August 7

Online Sales Tax: Money, Monopoly, and What It Means for E-Commerce

The U.S. government’s, or at least one Congressman’s, latest effort to establish economic parity between online retailers and their physical counterparts takes form in the Remote Transactions Parity Act. Representative Jason Chaffetz (R-UT 3rd District) introduced the bill back in June with the intent of requiring online businesses to charge sales tax on goods and services. The bill is meant to even the playing field between brick-and-mortar small businesses and larger online retailers, like Amazon and Ebay.

Currently, online stores only have to charge for sales tax if they have a physical presence in the state the customer is purchasing from. And while larger companies like Amazon and Ebay don’t prescribe to this rule since their business is entirely online, Amazon has started making sales tax agreements on a state-by-state basis. So, right now, the vast majority of Amazon consumers in the United States are paying sales tax regardless of the state they live in.

The largest downside to this new bill is the complications it would create for small online retailers. Today, we see more businesses getting their start online and raising the funds to finally establish a physical store, then continuing to grow both online and physically. However, even when businesses are just beginning online, they are subject to federal and state income taxes, depending on their number of employees and size, they might even have to pay employment taxes and corporate taxes.

And though the FCC voted back in February 2015 to establish strong net neutrality rules to maintain a free and open internet, the concept of net neutrality extends beyond just Internet providers to those that use the Internet as their marketplace. In the same way that large companies like Comcast could restrict or slow access to smaller companies, without net neutrality rules, large e-commerce sites could pay to maintain an advantage over growing retail start-ups or local businesses.

So, while this bill might help even the playing field between small brick-and-mortar businesses and large online retailers, it actually is disadvantageous for smaller online businesses. Not only because of additional tax charges, but because larger online corporations (again, think Amazon, Ebay) often sell larger quantities of product, or function as resale sites. Thus, even when charging sales tax, larger businesses are still able to offer better/reduced prices than many small online businesses.

It should also be noted that while 58% of customers will research products (and probably product pricing) online, about 40% of consumers make purchases inside a physical store at least once a week, as opposed to the 27% who make weekly purchases online. But out of those frequent online buyers, the U.S. Department of Commerce estimated that in 2012, the government lost out on about $23 billion in sales tax from those online purchases.

It is undeniable that the exponential growth of the Internet and its capabilities for business has forever changed the retail landscape. And as it continues to evolve, so will government regulations—regardless of whether you think government has business overseeing the Internet or not. Moving forward, what is important regarding this sales tax proposition is that establishing economic parity is more complicated than ever before. It’s no longer enough to try and make it fair between large corporations and small, local businesses, it’s also essential to find a regulatory balance for the physical and digital marketplaces.