Internet Sales Tax and Horton Brasses

I generally avoid talking politics publicly or in a place related to our company, but we are at a point where I feel it is appropriate.  It appears that the US Senate is prepared to pass a bill allowing states to collect sales tax from out of state retailers, IE internet and catalog companies.  The bill, S.743, would still need to get through the House of Representatives of course.  I feel it is important to share my thoughts and frustrations with what I feel is a very misguided bill.

On its face it seems simple, sales tax should be collected from all eligible transactions, whether they occur online or in a traditional retail store.  Avoiding sales tax on online purchases puts local stores at a competitve disadvantage when compared to web only companies.  At least until you consider shipping costs and the effect of delayed gratification on the sales process.  The fact of the matter is if there were a mere 50 sales tax jurisdictions in the US that would be somewhat practical.  But there are not 50 jurisdictions.  There are more than 9600 different sales tax areas in this country representing different states, cities, and counties.  That is 9600 different tax rates and rules, and 9600 different government bodies each with their own set of of Byzantine rules and regulations, many in direct conflict with each other.

New York City presents a great example.  New York State has a sales tax, and NYC has an additional sales tax on purchases made within the city.  What happens if a person lives in Westchester and has their package shipped to their office in Manhattan?  Who colllects the sales tax?  What if they live in Connecticut and ship to their office in NYC?  The way it works here in Connecticut is this:  If the order is either billed or shipped to a Connecticut address then Connecticut tax is due.  Does this conflict with the New York tax laws?  Of course it does.  Does this fictional person pay sales tax to Connecticut, New York State, or New York City?  All three entities are going to want their tax.

The second notable flaw specifically relates to business to business sales.  As you may know, items sold for resale are tax exempt.  The final purchaser pays the appropriate sales tax.  In our case, a Connecticut based cabinetmaker purchases hardware for a kitchen they are building using their tax ID (resale certificate), we do not collect the tax on that transaction, sales tax is collected on the final product only.  We report our “sales for resale” to the state of Connecticut every month according to the state regulations.  Each sales tax juristiction will have different regulations and resale reporting requirements, business to business companies will somehow need to report all of that data to all of those relevant collection authorities according to their rules.  Just to be clear, that is 9600 different sets of regulations to follow regarding business to business sales only.

The third area of concern is auditing.  Small companies would be subject to audit from each and every jurisdiction where they have had transactions.  That is potentially 9600 different agencies with the ability to audit virtually any small seller anywhere in the country.

Finally there are the exemptions-small sellers with revenues of less than $1 million per year would be exempt from sales tax collections.  That sounds good-at first.  Horton Brasses is well above that threshold, but what if you aren’t?  What if you are close to that threshold towards the end of the year?  Do you go over and then start collecting tax?  Do you have to retroactively collect sales tax?  Do you stop selling product to avoid the threshold?  This bill will keep small companies small.  It inhibits their ability to grow; which directly helps the large e-commerce companies (I’m looking at you Amazon).

Various lobbying groups are the driving force behind this bill.  The active lobbyists represent such companies as Wal-Mart, Home Depot, Best Buy, and Amazon.  Amazon?  Why would they be involved in this, doesn’t it hurt them?  Well, not really.  The implementation of this is such that there will be some very expensive software that will handle all of the regulations and collections.  Amazon, and other large web based retailers have the scale to amortize those costs quite easily.  The revenue threshold will keep many small companies from ever breaking the $1 million dollar sales barrier.  Small internet retailers will not have the volume to cover those costs without increasing prices.

I would like to say that we are not against sales tax per se.  But if the states are going to collect sales tax from out of state companies it is on the states to simplify the jurisdictions, rates, and reporting requirements.

This bill requires examination of the seen and unseen.  Please give it some thought and let us know what you think.  If you feel strongly about this, as we do, please contact your Senators.