What an online sales tax would mean
September 6, 2013 01:46 PM
Will online sales taxes scare away consumers? That’s the question before e-retailers as members of Congress ponder whether to pass a nationwide web sales tax law.
Take Corey Frons, CEO of eBulb Inc., which operates BulbAmerica.com, a web-only merchant whose sales have surged from under $5 million in 2010 to nearly $13 million in 2012. That puts the retailer at No. 604 among the top 1,000 e-retailers ranked by Internet Retailer.
Like many online merchants, BulbAmerica now collects sales tax in only one or a few states. That’s all BulbAmerica and other web-only retailers are required to do by existing law, which leaves them free from collecting sales tax in most of the 45 states, plus the District of Columbia, where sales tax is charged. Current federal law exempts retailers from collecting tax in states where they have no physical presence, or nexus in legal terms, such as stores and distribution centers.
That could well change in the next year or so. A bill that the U.S. Senate has already approved, which sponsors named the Marketplace Fairness Act, would authorize those 45 states and the District of Columbia to force more online retailers to collect sales tax, whether or not they have nexus. That has Frons and many other web merchants worried. “It’s a new headache I’d rather not have,” Frons says.
He says that shoppers might reconsider their online purchases if they had to pay sales tax.
“When an online shopper is putting in a credit card number, she wants to see trust logos, shipping information, etcetera,” Frons says. “If all of a sudden, instead of seeing a total price of $100 and free shipping, she now sees an $8 tax added on, she’s likely to think twice about it. I think the bounce rate in checkout pages will rise. It will be bad for e-commerce.” Statewide sales tax rates, including local rates, ranged from 4.35% in Hawaii to 9.44% in Tennessee as of January 1, for a nationwide average of 7.0%, according to the Tax Foundation, an independent research organization.
As explored further in the new issue of Internet Retailer magazine, Frons is hardly alone with his concerns.
Some retailers say they’ve considered how they might change promotional offers to counteract any negative effect of new sales tax charges. But e-retailers interviewed by Internet Retailer say they could not offer extra discounts for long at a time when they’re already competing on price and with competitors’ offers of free shipping. “It will have to be business as usual,” says Ben Kirshner, CEO of Coffee Serv Inc., which operates CoffeeForLess.com, No. 495 in the Internet Retailer 2013 Top 500 Guide with $19 million in 2012 web sales.
The actual impact of collecting tax on online sales is difficult to determine. A 2011 study of more than 34,000 online consumers by Forrester Research Inc. and Bizrate Insights found that only 8% of online shoppers say sales tax by itself makes a big difference in whether they buy online. But an April survey of 3,196 online consumers by comScore Inc. found that 54% said they’d be “less likely” to buy online with sales tax, while 42% said sales tax would have no effect on their online shopping.
That said, e-retailers could benefit from the passage of the federal sales tax law by taking advantage of services they might have shunned to avoid collecting sales tax. Eric Best, CEO of Mercent Corp., which helps online retailers sell through e-marketplaces like Amazon.com and eBay.com, says many of his clients have discussed how they might start using services, such as third-party warehousing and fulfillment services and affiliate networks, that they now avoid for fear of being forced to collect sales tax in states where those service providers are based.
“We expect our clients will become much more aggressive at adding Fulfillment by Amazon, Fulfillment by Sears, Google Express Shopping and affiliate networks,” Best says. “Merchants that don’t add these services could be left behind.”
For much more about the online sales tax issue, including the costs and capabilities of online tax software, check out the September issue of Internet Retailer.