Online sales accounted for roughly 10 cents of every retail dollar spent in the United States last year, and the inability to tax that commerce has become a vexing problem both for state officials and for bricks-and-mortar business owners who argue that the system gives Internet sellers an unfair advantage.
Updated: March 3, 2013 - 7:58 AM
The white 1969 Corvette, profiled in the center of Larry Lucast’s shop, was the essence of his business model. It was also, in the age of the Internet, his downfall.
He used the car, cut open to expose its insides, as a teaching tool.“It’s just a real handy way to show customers how the part is going to work once they take it home,” said Lucast, 64, owner of Corvette Specialties in Mounds View.
So handy, in fact, that customers used their newfound knowledge to buy the parts they needed online, where they didn’t have to pay sales tax. The practice — known as showrooming — eroded the 32-year-old business until Lucast closed the doors for good on Feb. 20 to pack the inventory and ship it to a buyer in South Dakota.
“People see that ‘no sales tax,’ and it’s just an irresistible draw to them,” Lucast said. “I bet there are thousands of mom-and-pop businesses that have gone out of business.”
Efforts are underway to change that. Currently, federal law prohibits states from forcing out-of-state companies to collect sales tax unless the seller has a nexus — a store, warehouse or other physical presence — inside the state.
Online sales accounted for roughly 10 cents of every retail dollar spent in the United States last year, according to ComScore, and the inability to tax that commerce has become a vexing problem both for state officials and for bricks-and-mortar business owners who argue that the system gives Internet sellers an unfair advantage.
Gov. Mark Dayton’s plan to reset the Minnesota tax code takes a swipe at the issue by broadening the definition of what constitutes a nexus to include independent folks in Minnesota who sell through an online retailer like Amazon or eBay. The measure’s impact would be minimal — $5 million in tax collected per year — since many online retailers would end relationships with independent sellers to avoid collecting the tax, the Department of Revenue said.
But states also are clamoring for Congress to give them sweeping authority to force all out-of-state online merchants to collect tax on items shipped to their states. A bill in the U.S. Senate that would do just that has the support of the Twin Cities Metro Independent Business Alliance, Best Buy, Target, Sen. Amy Klobuchar, Sen. Al Franken and even Amazon.com.
Still, consumers cherish Internet shopping that ends up being tax-free, and the bill’s opponents include eBay, its army of independent sellers and some taxpayer groups.
“Congress is going to take a lot of heat for passing this,” said Richard Pomp, a law professor at the University of Connecticut. “The politics are quite brutal.”
Internet sales-tax law stems from Quill vs. North Dakota, a 1992 U.S. Supreme Court decision that held that retailers are required to collect sales tax from customers only if they have a nexus in that customer’s state. States can impose the tax, but must collect it from consumers, not sellers.
Whenever a Minnesotan buys something online from a company that is not required to collect sales tax — a set of kitchen knives, Season 3 of “Downton Abbey,” a vintage steering wheel for a 1960s Corvette — the law requires that he or she calculate the tax and pay it to the state. It’s called a use tax, and almost nobody pays it.
“Most people don’t, and a lot of people don’t understand there is a use tax, and people are going to view this as a new tax,” Pomp said.
In Minnesota, roughly $400 million in tax revenue goes uncollected because the state doesn’t have enough people or time to track down all the people from Luverne to Lutsen who don’t pay the use tax.
Enforcement is a challenge
“Given the roughly 5 million residents in Minnesota, enforcing use-tax compliance poses significant resource challenges,” the Department of Revenue said in a statement.
The bill that would let states shift the onus from the buyer to the seller is the Marketplace Fairness Act, first introduced in 2011 and reintroduced in February by Sen. Dick Durbin of Illinois. The legislation would let states force all retailers to collect the tax, regardless of whether they have a physical presence in a state, so long as the state streamlines its sales-tax administration.
Retailers like Best Buy and Target have long promoted such a bill. Now Amazon, whose evolving business model requires it to build additional distribution centers in more states, supports it as well.
The Internet giant, which has been in protracted legal battles in New York and Colorado over whether those states can require it to collect sales tax, sent a supportive letter to the sponsors of the Marketplace Fairness Act in February, praising the legislation.
Once Amazon has a distribution center in a state, the company must collect sales tax there regardless of whether the Senate bill becomes law. Amazon already collects tax on sales in Arizona, California, Kansas, Kentucky, New York, North Dakota, Pennsylvania, Texas and Washington.
Amazon will soon have a distribution center near every major city in the country, including the Twin Cities, said Scot Wingo, CEO of Channel Advisors, a North Carolina e-commerce firm.
“The way they look at it is it’s better to have the Marketplace Fairness Act than to deal with the complexities of negotiating with each state,” Wingo said.
EBay, whose business strategy does not involve a nationwide network of distribution centers, opposes the bill. The company, which specializes in helping small businesses sell their products on the Internet, argues that the legislation doesn’t create a broad enough exemption for small businesses.
Under the bill, firms that do less than $1 million in annual sales would be exempt. EBay prefers the Small Business Administration’s definition of a small electronics retailer: $30 million in annual sales.
“EBay opposes any Internet sales-tax proposal that does not include a real small-business exemption,” said Brian Bieron, director of U.S. government relations and global policy for eBay, in a video posted on the company’s website. “The current bills all fall far short.”
Brandon Arnold, vice president for government affairs at the National Taxpayers Union, agrees, and also objects to the bill because it gives states authority over companies that have no legislative recourse in their state.
“You’re talking about a pretty complicated constitutional change, basically allowing state tax collectors to reach into other states,” he said.
Up in Mounds View, Lucast sees only how online retailers drove him out of business long before he would have liked.
He had just gotten an offer on his inventory from a man in South Dakota, and a down payment was in the mail. His five grandchildren were going to swing by that afternoon to see the shop one last time.
“It’s too late for me,” he said. “But if me talking to the media spurs anybody in government slightly toward doing the right thing, I’ll do something.”
His inventory of thrush bearings, rear-view mirrors, radio tuning knobs, ignition switches, mufflers, doors and steering wheels is now on its way to Sioux Falls. The new owner, he said, will sell the parts online.
Adam Belz • 612-673-4405 Twitter: @adambelz
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