Selling here, taxing there: The sales-tax loophole

Headsets.com CEO Mike Faith says his company might have to hire two staffers to handle administrative work. ERIC RISBERG / AP
Headsets.com CEO Mike Faith says his company might have to hire two staffers to handle administrative work. ERIC RISBERG / AP
Posted: January 28, 2013

Small-business owners may be closer to losing an advantage they've enjoyed during the e-commerce boom: being exempt from collecting sales tax in states where they're not located. And they worry they'll have to spend more money in the process.

Under federal law, a state or local government cannot force a company to collect sales tax on a purchase - whether that purchase was made online, by phone, or through mail order - unless the business has a physical presence in the state or locality. Physical presence can be a store, an office, a warehouse or a distribution center.

The arrangement saves money for those who use price-comparison sites or mobile apps or surf the Web for the best deal.

But lawmakers in Washington have several bills in the works that would require companies to collect the tax. Businesses are split over the issue.

On one side are small retailers who say they would not be able to bear the costs of collecting the tax and filing the reports and tax returns that the states and local governments require. They're worried they will have to buy software, hire staff, and deal with the hassle of keeping up with collections from thousands of municipalities as well as the states.

San Francisco-based Headsets.com might have to hire two staffers to handle the administrative work if what's called remote tax collection becomes law, CEO Mike Faith said. The company has operations in California and Tennessee, but sells to all 50 states.

"It's useless employment. It doesn't add value to the company," he said. "It's just another cost burden."

On the other side of the argument are in-state sellers and larger retailers with physical locations across the country that sometimes lose business to competitors who don't have to collect the tax. Even if two retailers charge the same price for an item, many shoppers choose the seller that doesn't collect taxes, to reduce their overall cost.

"It's a problem that needs to be addressed. It's an un-level playing field," said David French, a lobbyist for the National Retail Federation.

And on yet another side are the state and local governments that stand to collect billions if a bill makes it through Congress. States have wanted the tax money for decades and are particularly eager for it now because the sluggish economy hit their revenue hard.

The payoff could be substantial. Uncollected taxes on Internet sales alone last year are estimated at $11.4 billion, according to researchers at the University of Tennessee.

Knowing how much to tax and where can be complicated. Elgin, Ill., a suburb of Chicago, is in two counties, Cook and Kane, for example. In Cook County, Elgin's sales tax on general merchandise is 9.25 percent. In Kane, it's 8.25 percent. The state's base sales tax is 6.25 percent.

Three bills were introduced in the last Congress that would authorize the states to require remote sellers to collect taxes. In the Senate, the Marketplace Fairness Act had bipartisan support but did not come to a vote.

If a bill were passed, it would likely require that states make the process easier for small companies, and that the smallest of those businesses are expected to be exempt. The proposed Marketplace Fairness Act exempted those with $500,000 or less in remote sales.

"That's not set in stone," said Sen. Dick Durbin (D., Ill.), one of the bill's sponsors. "I want to come up with a number that spares anyone from concern."

Durbin added that the tax-computation software will have to be user friendly: "This is the only way we can sell this."

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