Response: LA Times invents more Amazon Tax.

February 22, 2010

The LA Times ran an article this weekend about California ABX8 (the emergency amazon tax) – unfortunately, the LA Times does not offer a web-forum for comments/responses. The Article incorrectly states in the subtitle and in the article that the effect of this bill could result in $150 million per year in new revenue for the State of California. The fact-checker seems to have been asleep-at-the-wheel, because the actual Senate Analyses (available here) projected the revenue effect of this bill would be $107 million. Don’t get me wrong, $107 million is a lot of money, but when your state has a 14.6% budget gap, perhaps everyone should start double-checking their numbers and actually doing math. Substantially more revenue is “still left on the table” by all the other out-of-state sellers that are not collecting sales tax (hard to imagine sometimes, but there actually are other companies making sales online – about 3.5 million of them).

California should simply become a Full Member State of the Streamlined Sales and Use Tax Agreement (or SSUTA). The California Legislature already passed related legislation last fall. California now should take the remaining steps to become a full Member State under the SSUTA – a collective effort of 44 states (including California) which has been developing for the last 10 years to simplify and standardize sales tax laws to enable congressional action at the federal level to resolve this matter once and for all.

In anticipation of California’s likely ultimate adoption of SSUTA provisions, at Fed-Tax.net we have already prepared our TaxCloud systems to provide real-time calculation of accurate local sales tax for every jurisdiction in California. Take a moment to try it out at http://myrate.taxcloud.net/. Once California becomes a full Member State under the SSUTA we will be happy (and honored) to help merchants all over the country accurately calculate local sales tax for California residents. We will do this at absolutely zero cost to merchants or consumers (we are paid by the states to perform remote merchants’ sales tax management, reporting, and remittance obligations).

We know nobody likes paying sales tax, but the fact remains that this tax is still due, and when merchants do not collect at the time of sale (as they do in all physical stores), then the consumer is obligated to report and pay these taxes on their own. Since few people do, these taxes go unpaid resulting in massive budget shortfalls as California is now enduring. We think it is terrible that through lack of federal action to-date on this matter an entire generation of consumers on the Internet have grown up feeling that not being charged sales tax on Internet purchases is their constitutional right – and are frequently shocked to learn that they are committing tax fraud when they willfully or at least negligently fail to report and pay these taxes. It is time for California to tell all Internet merchants (not just those with affiliate marketing practices) that it is time for them to respect the budget decisions made by the California voters and their elected officials and to stop pretending it is too difficult, too complicated, or too costly to calculate local sales tax. Our TaxCloud service demonstrates these arguments are without merit, and these merchants are simply avoiding collection as a way to bully local merchants (who must collect sales tax) out of consumer price-competition.

California’s Projected 2010 Budget Shortfall: $ 14,400,000,000 1
AXB8 Projected Revenue: $ 107,000,000 2
Difference: $ 14,293,000,000 3

Total Sales Tax due by California consumers based on purchases from out-of-state Internet retailers
Uncollected Sales Tax (from remote sellers) $ 1,441,100,000 4

Admittedly, becoming a full SSUTA Member State will not solve all of California’s budget deficit, but at least it can cover 10% – and it is not a new tax, and no budget cuts are required.

1-Source: Center on Budget and Policy Priorities – http://www.cbpp.org/cms/index.cfm?fa=view&id=711
2 – Source: State of California Senate Analysis – http://www.leginfo.ca.gov/pub/09-10/bill/asm/ab_0001-0050/abx8_8_cfa_20100219_175402_asm_floor.html
3-Source: Simple Math
4-Source: The University of Tennessee 2009 Study: State and Local Government Sales Tax Revenue Losses from Electronic Commerce

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Colorado Senate revises HB 1193 to focus on Use Tax Reporting

February 9, 2010

The Colorado Senate has revised HB 1193 quite dramatically.

The Good News: It no longer appears to be targeting affiliate marketing.

The Bad News: It makes no mention of conforming to the Streamlined Sales and Use Tax Agreement. In fact, it now goes into extraordinary detail asserting jurisdictional authority over out-of-state businesses.

Specifically, it states that any out-of-state business which does not voluntarily collect and remit Colorado sales tax must:

  1. Notify each Colorado customer that sales or use tax is due on all purchases from the business, and the purchaser must specifically file a sales or use tax return with the Colorado Department of Revenue. Failure to deliver this notification will subject that out-of-state business to a $5 penalty for each failure to notify.

  2. Send separately to each Colorado customer (by actual First-Class Mail by itself in an envelope labeled “Important Tax Document Enclosed”) an end-of-year summary showing the total amount paid by the customer for all purchases over the past year to that business, and reminding the customer again of their obligation to file a sales or use tax return and pay the appropriate use tax for all such purchases.

  3. Send to the Colorado Department of Revenue (by March 1 of each year) a statement detailing each Colorado customers purchasing activities during the preceding calendar year. Failure to send this statement shall subject the out-of-state business to a $10 penalty for each purchaser which should have been included in such annual statement.

There is also a fair amount of language devoted toward empowering the Colorado Department of Revenue the right to issue subpoena requiring attendance to take oral or written testimony under oath, and to produce all records relating to sales to Colorado residents, along with authorization for judicial enforcement and ability to order judgment against the retailer for contempt.

Holy burden building batman!

Now instead of businesses cancelling their affiliate programs in Colorado, businesses may just suspend all sales efforts in Colorado.

Please Colorado legislators – can we have a few minutes of your time to discuss this matter?

UPDATE 3/2/2010 – This was signed into LAW last week (on Feb. 24th) by the Governor of the State of Colorado.

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Response: New York Times rails Amazon (but no one else)

December 28, 2009

On the heels of several other articles by other major papers, Randall Stoss wrote a seething article in the New York Times about how Amazon should be required to collect sales tax (quite noticeably the article didn’t point out or suggest that any other Internet retailers should).

This is yet another article about how Amazon.com should be collecting sales tax, even when most other retailers are not.  Another curious aspect of this particular article:  Why does it bother the Old Gray Lady in New York, since Amazon.com is already collecting and remitting sales tax from consumers in New York (though they are understandably not pleased about it).

In our view, the media is putting alot of effort behind a recent report (“Amazon’s Arguments Against Collecting Sales Taxes Do Not Withstand Scrutiny“) published November 16, 2009 by Mr. Michael Mazerov of the “Center on Budget and Policy Priorities.”  Mr. Mazerov is not new to the issues of Internet sales tax matters, having articulated many aspects of the debate more than ten years ago:

In 1998, Mr. Mazerov co-authored a detailed report “A Federal Moratorium on Internet Commerce Taxes Would Erode State and Local Revenues and Shift Burdens to Lower-Income Households.”  Sadly, the conclusions drawn in 1998 ultimately came to pass primarily, although not specifically related to what became known as the “Internet Tax Freedom Act” – which thankfully limited it’s so-called “moratorium” to only ”Internet access” and “online services” specific taxation (this legislation was recently extended through 2014).  Particularly prescient was their conclusion at the time:

“The avoidance by affluent consumers and businesses of sales taxes on Internet purchases could mean higher sales taxes or reduced public services for low- and moderate-income households”

In 1999 Mr. Mazerov authored a summary report entitled “Should the Internet Remain a Sales Tax Haven?” (also for the CBPP).  Also a worth-while read on the subject.

Finally, and perhaps most insightfully, in February 2000, Mr. Mazerov testified alongside Iris J. Lav (CBPP Deputy Director) before the US Senate Committee on the Budget:

“When a seller does not collect and send the tax to the state of the purchaser, customers who receive the goods are supposed to pay state and local sales taxes directly. Consumers are supposed to file a tax return showing the value of the untaxed goods they have purchased from remote sellers and to pay the tax on those purchases. More than one-third of the states actually provide information and forms in their personal income tax booklets to help consumers pay sales taxes on purchases from out-of-state companies. Nonetheless, compliance with this self-remittance requirement is minuscule in the case of individual consumers and spotty in the case of businesses — especially small businesses.

The combination of weak tax compliance by consumers and the limited obligation of remote sellers to collect taxes is eroding the sales tax base of state and local governments. As I will discuss shortly, it is disproportionately upper-income households who are avoiding paying their fair share of sales taxes by purchasing from remote sellers. Both the revenue loss and the unfair tax advantages for the affluent are likely to increase because of the still more rapid growth in Internet purchasing that is projected to occur in the next few years.”

Their testimony concluded:

“If initial steps are not taken soon to end the de facto sales tax exemption that applies to most Internet and mail-order purchases, the sales tax burden on lower-income Americans is likely to rise and the access of all citizens to high-quality education and other critical state and local services could be impaired. These outcomes will be all the more severe should Congress enact a blanket sales tax exemption for Internet purchases or even tighter restrictions on the ability of states to require remote sellers to collect and remit sales taxes than currently exist. There is a practical alternative to both of these options. Congressional endorsement of the principle of equal tax treatment of retail store purchases, mail-order purchases, and Internet purchases could encourage the electronic commerce and mail order industries to work constructively with state and local governments toward a workable compromise. Such a compromise could achieve a reduction in sales tax compliance costs for many businesses, while ensuring both that no business or individual avoids paying a fair share of sales tax and that state and local governments remain capable of financing necessary services” 

It seems without question that the CBPP has been familiar with the issues at hand for quite some time – and that Mr. Mazerov is more than sophisticated on these matters, and we eagerly look forward his updated report on the matter, which we predict will be titled: “The first decade of Internet Sales Tax (or lack thereof).”

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Response to Forbes “A Flat Sales Tax?”

December 14, 2009

Forbes just published an article entitled “A Flat Sales Tax?”. We feel it would be valuable and instructive to clarify some of the points of the article which provides a brief and not entirely accurate portrayal of the Streamlined Sales and Use Tax Agreement.

While it is true that the Streamlined effort puts in place a framework to standardize rates and definitions, it in no way constructs a “flat sales tax” as the title of the article might suggest.

The article also points out that to join the Streamlined effort several current “holdout” states (New York, California, Texas, Florida, Ohio and Illinois) would have to “change some of [their] most cherished and protected means of gouging consumers.” One side effect of the Streamlined effort is its tendency to bring such practices to light, and as they are a means of “gouging consumers”, perhaps changing these practices is duly warranted.

Specifically referring to the cited examples of these holdout states surrendering exemptions for particular items (the author references “cheap clothing” and “diesel fuel for agricultural use” among a few others), the Streamlined Governing Board (which is composed of representatives from each Member State) regularly revises what is referred to as a “Taxability Matrix” to allow Member States to guide the common definitions for exemptions to be used across all participating states. This matrix and other data is ingested by services like our TaxCloud service (available free of charge in Q2 2010) so that sellers and consumers never have to think twice about whether they live in Kansas or Washington, or are buying cocoa puffs or coats.

In its current form, the Taxability Matrix absolutely allows for thresholds to be defined such that particular classifications of items below a particular price could be tax exempt, and allows for local sales taxes to be levied (or exempted) on 900 numbers, parking, and yes, even a specific definition for fur coats (Streamlined does not mandate a single category for clothing as suggested in the article).

The article continues by describing how the State of New York has gotten restless in awaiting legislation necessary for the Streamlined effort to become adopted as federal law (The Main Street Fairness Act, soon to be introduced before congress). Last year New York enacted a law which redefines the concept of substantial nexus (i.e. “place of business”) to single-out Internet-based affiliate network businesses. Forbes readers should have significant concerns about this state legislation, because it could be interpreted to include any direct response mechanism (or for that matter, any contractual relationship) as it blurs the historical “bright-line” test of physical presence to determine substantial nexus, which is why we call it Complex Nexus. We have written about this in much more detail on our Blog.

In conclusion, we feel the Forbes article is both well written, and well-considered, but we believe some clarity on a few of its points would be helpful for readers.

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Why is eBay misleading the public about Streamlined Sales Tax?

July 27, 2009
We completely agree with the recent Seattle Times editorial advocating congress to enact consistent sales-tax laws, and we take issue with the misleading letter-to-the-editor response by Tod Cohen of eBay.

Mr. Cohen’s letter is correct that enacting such legislation would require online businesses to comply with local tax codes – in the same manner that local businesses must. However enacting such legislation does not necessarily impose “significant new costs and accounting burdens.”  It is true that businesses will be affected – they will need to modify their systems to lookup local tax rates.  Online merchants well equipped to implement such changes – as they needn’t be any more complicated then mechanisms relied upon to lookup shipping charges (a generally expected feature during checkout).

It is disingenuous to suggest to the readers that the streamlined approach to sales tax would involve an “increase [of] taxes on small businesses in such a tough economy.”  Sales taxes are paid by the consumer, at the time of purchase.  Just as sales tax is collected at the grocery store when buying a gallon of milk, so too they should be collected by the online merchant when buying a product.

Instead of spending it’s time prodding public opinion, perhaps eBay government affairs could focus its efforts on being part of the solution – by collecting local sales taxes that local voters/consumers have already agreed are needed to pay for our roads, schools, police, and hospitals.  We would be more than happy to help eBay achieve this goal.

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