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Is the Party Over for Online Retailers?
Online retailers have revolutionized the way today’s consumers shop. People of all ages are discovering that shopping online is safe, convenient, and often less expensive than shopping at conventional “brick and mortar” stores. This new industry is still in its infancy, but its growth is nothing short of spectacular. The U.S. Bureau of the Census estimated there were $4.1 trillion in retail and wholesale transactions over the Internet in 2010 and this number is expected to get much larger in the years ahead.
Since current sales tax laws typically only apply to goods and services purchased in the seller’s home state, new Internet businesses have benefited by selling their products tax free to out-of-state customers. Until recently, politicians have supported this practice, because it encouraged the growth of a whole new type of industry and politicians know that business growth means new jobs.
Potential Revenue Gains
Opinions are changing however, and the party may soon be over for Internet retailers. Traditionally, state governments have relied on sales and use taxes for roughly a third of their total tax revenue. Local governments depend on sales taxes too, and derive over 11% of their tax revenue from sales and use taxes. With online sales booming, these governments are seeing a dramatic decline in revenue. It is estimated that Internet transactions were responsible for an estimated loss of $11.4 billion dollars in revenue to state and local governments throughout the United States in 2012.
With a stagnant economy and declining revenues, governments are looking for money anywhere they can find it. One place they are turning is online sales. Many legislators think that taxing online sale will level the playing field and be beneficial to traditional “brick and mortar” business in their constituencies. That is why large retailers like Walmart currently support an online sales tax. Many legislators aren’t as concerned about this perceived “fairness” issue. They just see online sales as an enormous new source of potential revenue.
Possible Consequences for Small Businesses
Although a few larger online retailers like Amazon support the concept of an online sales tax, the tax could be devastating for smaller retailers. Many think it would be an administrative nightmare to comply with an online sales tax law, since each state and municipality has their own tax laws. With thousands of different tax jurisdictions, each imposing their own tax rate, it could be extremely complex for sellers to deal with a different set of rules for every out-of-state buyer.
Inevitable Outcome?
Despite the complexities, the Marketplace Fairness Act has strong bipartisan support in congress and the legislation is expected to pass as early as May 6. With government at every level hungry for new sources of revenue, it’s hard to find opposition to the proposed Internet sales tax. Even those who have pledged not to increase taxes tend to support this bill, saying that it is not a new tax, but simply a mechanism that allows states to more effectively enforce existing tax laws.
With online sales continuing to grow at an astounding 16% a year, it is increasingly clear that state and local governments are going to want a share of this lucrative pie.
About Gevril Group
Gevril Group is the exclusive US representative for select European watch brands, distributing and servicing luxury, fashion and sports timepieces at a wide range of price points. Gevril Group also operates a full-service watch repair department staffed by master Swiss watchmakers.
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