Trump’s war with Amazon continues, and small businesses may be collateral damage
Internet retailers may no longer be able to sell to customers nationwide without collecting sales tax, as the government prepares to take aim at a often-exploited loophole.
Speaking at a hearing in front of the House Ways and Means Committee last week, Treasury Secretary Steve Mnuchin said that President Trump “feels strongly” that all companies that do business over the Internet should be required to pay sales tax, regardless of where the companies are physically located.
This statement reignites a longstanding debate between Internet-only operations such as Amazon, eBay, and Etsy, and traditional brick and mortar retailers. Under current law, retailers are only required to charge sales tax in states where they have a physical presence. As a result, many Internet retailers set up headquarters, warehousing, and distribution in states that do not charge a sales tax such as Delaware and Oregon. In doing so, they can avoid the additional cost of sales tax and still service customers nationwide. Traditional chains, which typically have a physical presence in every state, argue that this gives an unfair advantage to online-only retailers.
This is not the first time that President Trump has targeted Internet retailers. Last year, the president accused Amazon of using this loophole to damage physical businesses and the local areas in which they reside.
Amazon is doing great damage to tax paying retailers. Towns, cities and states throughout the U.S. are being hurt - many jobs being lost!— Donald J. Trump (@realDonaldTrump) August 16, 2017
In fact, this stance in favor of online sales tax has been part of an often-bizarre back-and-forth with Amazon founder and CEO Jeff Bezos that stretches back several years, with Trump accusing Bezos of using the Bezos-owned Washington Post to spread fake news, and Bezos offering to send the President into space.
Why Internet sales tax misses the mark
Oddly enough, requiring online retailers to charge sales tax may miss the intended target. The dynamics of Amazon’s business have changed quite a bit over the past several years, and the need for Amazon to deliver things quickly to the end consumer has altered their distribution network considerably. After facing criticism for many years for dodging state sales taxes, Amazon now builds many distribution centers close to major metropolitan areas and population centers in an effort to fulfill orders as quickly as possible and expand their next-day and same-day capabilities.
In fact, Amazon has long been a proponent of proposals to require online retailers to charge state sales tax, supporting bills such as the Marketplace Fairness Act as far back as 2013. At the start, Amazon supported these bills because it was often granted sales tax exemptions for building warehouses in states. As their physical presence increased and speed became the key, however, the company found itself subject to more state sales tax laws, and last year the company began charging state sales taxes on all Amazon purchases.
So, who then gets affected by this kind of legislation? It is worth noting that while Amazon charges sales on its own products in its warehouses and distribution centers, third-party vendors who use Amazon as an online marketplace can continue to evade sales taxes through the website. Amazon reports that nearly half of all revenue comes from these third party vendors, so this is not an insignificant group by any means.
Of greater concern are smaller businesses and startup companies, which use Internet retailing as a way to compete with large multinational chains. Requirements that force online businesses to charge sales taxes everywhere place a burden on online retailers that traditional stores do not have to face.
Consider that a physical brick and mortar store need only worry about the different local sales taxes that they face for the state county and city in which they reside. There are thousands of different sales tax combinations across the nation and forcing online retailers to comply with all of them can be a very costly requirement. The True Simplification of Taxation association estimated that implementing systems to properly charge sales tax could cost $80,000-$290,000, with annual maintenance costs of $57,000-$260,000.
For larger online retailers, this cost is relatively small, but for small online businesses this represents a significant barrier that local physical businesses would not face. In practice, it would likely discourage small businesses from setting up their own websites and means of connecting to the customer. Instead, small businesses would likely flock to large online marketplaces like Amazon, which have these sales tax systems in place, to conduct business, with the ironic result of giving Amazon yet another way to extract revenue from them.
Overall, this type of policy feels a bit misguided. Yes, some online retailers are able to exploit a tax loophole to avoid paying sales taxes in most cases. However, there are many different costs associated with online vs. physical stores and the decision to buy online instead of in store is likely more about convenience than whatever sales tax is saved by the customer.
In addition, this type of requirement is fairly unique in that it allows states to enforce its laws across borders, meaning that businesses would be subject to a tax from a state in which they cannot vote. In that sense, this type of regulation feels like an attempt by states to expand their reach under the guise of “fairness”, and a means for states to try and extract more money from businesses.
Ibrahiim Bayaan is FreightWaves’ Chief Economist. He writes regularly on all aspects of the economy and provides context with original research and analytics on freight market trends. Never miss his commentary by subscribing.