Sales Taxes and Internet Retail

by Alana Wingfoot

It seems like every time I look at my local newspaper these days, there's an article on why purchases made over the Internet should/shouldn't be taxed. A few of them are interesting and thought-provoking, but most of them seem to break down into the following two camps:

  1. 'Internet purchases should be subject to the local sales tax, because we're losing money when folks in our city shop online! '
  2. 'Internet purchases shouldn't be subject to local sales tax unless they're shipped in the state where the Internet business is located, because people won't shop online if they have to pay sales tax!'

As is usual with me, I'm on the fence. But what really pushes me to the anti-tax side is the way the pro-tax people want to do it: the customer pays the local and state sales tax for their location, not the business location.

Here's why I think this is a bad idea. Say I open up a business selling handmade jewelry, and I decide to market some of my work on the Internet. Hey, cool, someone from New York City made an order! And someone from Dothan, Alabama ordered something, and someone from Albuquerque, New Mexico bought a few things, and someone from Tacoma, Washington bought some stuff, and so on and so forth.

Except that since I have to collect each buyer's local tax, I need to get some database that has all the local tax rates for the U.S. (and update it regularly, since these rates change). I need to send umpteen checks to umpteen different city and/or state governments. I might even have to fill out extra paperwork with the cities where I do the most business, depending on how the Internet tax law is set up.

And I might have the same problems selling out of town through a regular print mail order catalog. Somebody in the bill's process will point out that it's really dumb to be able to order tax free by fax or by snail mail but not by web or email, so if it goes through, there's a good chance that I'd have to collect the taxes even if I used a print catalog.

So what happens in the end? The fourth time I write a check for under $2.00 to some city because of that single small purchase, I'll probably take down my website, forget the catalogs, and go back to selling locally -- or if I really need that out of town business because I don't have the local customer base, I might just have to close down entirely.

Now, a large company may be able to handle all this hassle. I don't see Land's End or Tower Records closing down because of sales tax issues, and if can survive with the amount of money they lose annually, they can certainly survive this. But the small businesses -- many of which are woman-owned -- are going to be hurt badly.

If we're going to collect sales taxes on Internet purchases, why not base the taxes on where the business is located, rather than on where the customer is? Yes, in some cases it would be really difficult to decide what the company's home base is, and yes, a lot of companies would promptly relocate to states without sales tax, but for the small business clearly located in one home or one storefront, this method would be a managable proposition; they've probably already filed the paperwork to collect the taxes anyway, and there's nothing new to calculate. (Okay, international orders will still be complicated, but that's true in any event.)

I've never seen this option mentioned in any of the articles I've read on the subject, but I think it bears discussion. We're talking about measures that could affect any of us who open an Internet retail business -- any of us who open a retail business at all. If we do end up with sales taxes on Internet retail, let's at least make sure they're taxes that small businesses can handle without collapsing.

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Copyright © 2000 by Alana Wingfoot

05/24/07 at 15:43