The Taxman Cometh

Amazon, Overstock and countless others exploit a loophole in online sales that bypasses the sales tax for most states. In order to make things ‘fair’, brick and mortar retailers and local governments are pushing states to fix the issue. The only ‘fix’ bureaucrats know is passing new laws to patch the loopholes technology has exploited. In this case online commerce is putting dents in state budgets and causing traditional retailers to gripe about the unfairness of it all. But raising funds by going after eCommerce sites will not gain additional money for states and will hurt overall growth by forcing consumers to small online business.

Changing Models:

I work for a local retailer (sporting goods) that relies heavily on walk in purchases. I hate losing out to warehouse businesses like Eastbay for cleats and Softball.com on bats and gloves. The problem comes like this. Yes, these big box companies with their online presence hurt the local shop by offering reduced rates on similar items with no sales tax. But we aren’t just salesmen we are consumers too and as members of any community we buy goods online as well. Some things are tough to find locally or even within state, like a vintage Walter Payton jersey. Buying online is the only choice.

Second, no one knows how their current business model might change in the future. Ours has moved partly to online sales. It is a specially designed 'shopping cart' of sports gear with the sizing needs of the athlete. Set up by the local coach for the player. This makes getting more business easier than ever since it doesn’t require the parent of the student to drive to the store and order the goods. It’s a classic way of solving an age old problem in the team sports business. Customers still pay the required sales tax processing fees from the website, but the fact that such a large percentage of business has moved online makes us cautious about additional taxes. We don’t know what the business of the store will look like in 5 to 10 years and may be radically different in 20. By lobbying for tax laws on internet sellers, local businesses are thinking short term. Better to lobby for lower rates on everyone.

With the way that businesses get acquired and transformed into something wholly different, not passing new taxes seems the wise choice. IBM, DuPont and Koch Industries have all seen dramatic changes in their core business models. They’ve all bought and redesigned the purchased companies to benefit the parent organization. IBM has the longest history of the three and is mostly in the business of software and services instead of just selling room size computers. How many smaller businesses did IBM buy and sell over the years, using components they developed and patents they bought from startups? Successful companies, even small ones, likely change some central part of their business model and adapt to changing consumer tastes, marketing fads or input costs.

Unintended Consequences:

The goal of governments should be to increase the overall number of transactions and money moving in circulation, not slow it.  State governments aren’t trained to think like innovators and develop products that fix ingrained social and financial problems. This isn’t their fault it’s just how the system works. We don’t ask Apple to pave city streets and hire bus drivers we shouldn’t expect governments to earn a profit, they redistribute it. The tax law being considered (MarketplaceFairness Act) would be terrible for consumers used to buying from Amazon and avoiding the tax. Previous laws (current ones) made sellers charge sales tax if the company had a physical presence in the state of the buyer. Amazon does not reside in Oklahoma so bring on the savings! Amazon charges sales tax (in the United States) in 28 states while the rest are betting on the MFA to pass.

 The bill contains an exemption for companies that make less than $1 million a year in profit. Companies just over the threshold will ‘adjust’ their earnings scale to get below it. This favors small online sellers and disadvantages companies like Amazon and Overstock.

A better option than bleeding new business is allowing tax cuts for current ones and large incentives for selling locally. Oklahoma has some good incentives for business but governments will be loath to give up existing streams of revenue through any tax cuts. Especially with recent oil prices still so low. It is a rough task asking buyers used to avoiding tax to suddenly pony up. They are likely to buy from the smaller internet sites rather than shop locally and pay tax.

Prediction:

The Marketplace Fairness Act will eventually pass and more internet companies will gobble up the commerce leaving Amazon, state governments still won’t get the money. Best bet, start a business selling online and keep the totals below $1 million; oh, and buy goods locally as much as possible.