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States Battle Retailers Over Taxes

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(Editor’s note: This story is part of a large story looking at online sales tax. For the smaller story that focuses on solutions being considered, click here.)

As states face ever-increasing budget deficits, many are turning to online shoppers to close the gap by imposing Internet sales taxes – despite objections from large predominantly online retailers and some small mom-and-pop shops.

“It’s a very convoluted situation,” says Dick Smith, owner of WildCountry Inc., who has two ski shops in Illinois.

Convoluted, though, is an understatement as people try to stay informed about the ever-changing Internet sales tax landscape.

“It’s a bit of a mess,” says Eoin Comerford, online retailer Moosejaw‘s marketing and technology senior vice president. “It’s just a burden on your average outdoor retailer to keep up with all the legislative back and forth. It’s just one more thing you’ve got to worry about.”

onlinetaxes01

As it sits now, retailers with a physical presence in a state have to charge their in-state customers sales tax. That goes for retailers like Best Buy, Amazon, REI, Target and local mom-and-pop shops. Part of the controversy is defining “physical presence.”

Some states, like New York, Illinois, Arkansas and a handful of others that have passed online sales tax laws say that any retailer with an affiliate in their state is considered to have a physical presence. Affiliates, in most cases, are bloggers or owners of other websites like CouponCabin that host the retailer’s ads. In exchange for driving sales to the retailer, the website owner receives commission.

But opponents say it’s unconstitutional to equate an affiliate with a physical presence, citing the Commerce and Due Process clauses of the U.S. Constitution. The clauses essentially maintain that, in order to tax, a state must establish a direct link between the state and the business it wishes to tax. And, for the opponents, an in-state affiliate isn’t a direct link.

On the other hand, proponents for an Internet sales tax say it levels the competitive playing field if all retailers collect tax (however, the government requires all online shoppers to pay sales tax whether or not the e-tailer collected it).

“Right now the playing field isn’t level,” says Jason Brewer, communications and advocacy vice president for the Retail Industry Leaders Association, a group that advocates primarily for big-box retailers.

“It’s a built-in price advantage,” he says. But retailers have mixed opinions.

In states that have passed laws requiring online sales tax collection, online-oriented retailers like Evo, Moosejaw, Backcountry and Amazon would rather drop affiliates than collect sales tax.

Nathan Decker, Evo‘s e-commerce senior manager, says just that. Evo is predominantly online but has a store in Seattle and is looking to expand. Decker says the company’s roughly 3,000 affiliates help drive about 5 percent of the company’s revenue.

courtesy SIA

courtesy SIA

And of those 3,000 affiliates, about a dozen drive the majority of the sales.

However, Decker says they’ll consider online-sales-tax laws when the retailer looks to open more physical stores.

At Moosejaw, dropping affiliates makes a bigger impact.

“Our affiliate program is our biggest marketing channel,” Comerford says.

Its affiliates help drive between 13 percent and 19 percent of the company’s revenue. However, in terms of revenue generation, of its roughly 5,000 affiliates, about 50 are meaningful and about 10 of those are really meaningful, he says.

Affiliates aside, both Comerford and Decker agree that their companies have a slight advantage over local retailers because they don’t have to collect sales tax for a state in which they’re not located.

But many consumers say avoiding sales tax isn’t a top reason they buy online, so some people, like Comerford, don’t think sales tax is much of a competitive advantage.

Predictably, many brick-and-mortar ski shops disagree.

“The way it sits now, the playing field is definitely not level,” says Rich Pestien, owner of Bushwhacker ski shop in Peoria, Ill.

In order to compete with online retailers, he says he either has to reduce prices 8 percent to offset the sales tax rate, or let customers buy products from a competitor online after doing research at his shop. Either way, he says, it’s a losing situation for him.

Taxing Internet sales becomes a bigger issue as the price tags increase.

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courtesy SIA

For at least the last four years, ski gear average prices online have been lower than brick-and-mortar prices, according to SnowSports Industries America.

And for skis, the average price online is between $67 and $129 cheaper than in specialty stores.

“On big-ticket items [lack of sales tax] absolutely becomes an incentive,” says RILA’s Brewer.

And that’s why Fred Coriell, owner of Peak Performance Ski Shop in Killington, Vt. doesn’t want Internet sales taxed.

Because the majority of his in-store and online customers live out of state, he’s worried that taxing Internet sales would hurt his business – especially because about 30 percent of his business comes from the Internet.

Selling a pair of $1,000 race skis means the customer is charged about $70 in tax. Most customers wouldn’t go for that when they could buy elsewhere and not pay tax, he says.

To incentivize in-store customers, Coriell offers a discount at the same percent as the sales tax.

“To me it’s fair. They made the effort to come here, so why would I penalize them for not making the purchase off their iPhone,” he says.

Categories: Features

6 Responses to “States Battle Retailers Over Taxes”

  1. Rick says:

    One day we will have a on-line sales tax. It's got to happen. States are losing billions in tax dollars to on-line sales that have no sales tax. The problem is trying to make it equal for everyone. Only time will tell how it will happen.

  2. jw7 says:

    Yes, tax on-line sales and keep the business inside the state.

  3. dr09 says:

    The no sales tax on out of state sales laws are from the dark ages, everyones home state is losing millions in revenue and property and state income taxes will have to cover the difference. It is time for this policy to move into the 21st century and all the internet retailers will have to adjust. It is not fair to local shops who work in the trnches and build the sport to see the sales stolen over sales tax

  4. xcergy says:

    Affiliate nexus is unconstitutional. "Paid advertisers' for commissions that amount to pennies per item, for goods that web site owner DOES NOT PHYSICALLY HAVE does not constitute nexus.
    Even if legal and those sellers do collect Sales Tax, it represents only a small percentage of Sales Tax (Use Tax) owed. These laws do not address eBay or web sales located out-of-state.
    This is a consumer issue, not one for online retail. State DORs need to do a better job f educating the public and collection methods. Enforce existing law first before writing new bad law.

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