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Debating an Online Sales Tax

MJSA’s LinkedIn group members weigh in on proposed legislation that would require e-tailers to collect sales taxes

By Peggy Jo Donahue
Originally published August 2012

The Catalyst

man about to make a purchase on computerA variety of news media outlets published articles predicting that either this year or next, Congress will enact legislation giving states the authority to demand payment of sales taxes on purchases made by their inhabitants when they shop outside their home states. Online retailers, who have been exempt from such mandatory tax collection for 20 years, would be most affected, because they would need to collect those taxes and send them to the various states.

See below for the group’s responses. For more conversations happening on MJSA’s LinkedIn page, click here.

The Responses

“I think it is inevitable [that these bills will pass], and probably a good thing,” said Calla Gold of Calla Gold Jewelry in Santa Barbara, California, who sells custom-made jewelry both face-to-face and online. Gold doesn’t believe it will have a negative effect on her Internet sales. “People who buy online don’t just do it to save sales tax. They do it to be in control, to buy at their convenience, and because it is a buying model they have gotten comfortable with.”

Arthur Klein, a luxury goods and jewelry marketing consultant with Match Marketing Group, wondered if the change will benefit brick-and-mortar retailers, since the collection of sales taxes would level the playing field between them and online sellers. “If online companies have to charge sales taxes, will it drive consumers to shop at local retailers [again]?” he asked.

“Arthur, it really depends on the product and to what degree it’s a standardized one. A book is a book is a book [so comparison shopping is easy]. However, I think Amazon’s business model is not based on tax exemption but on efficiencies,” said Patrick Slavenburg, founder of Farlang, an Internet community of designers and artists working in jewelry design, gem cutting, and other areas focused on unique objects. “With non-commodity products [which jewelry can be], it’s impossible to compare prices anyway, and the margins jewelers charge are so random.”  

Slavenburg also pointed out that especially for popular online jewelry items priced around $100, a 6% or so sales tax is really not going to have much of an effect on a consumer’s decision to buy an item online or in a store. “I’d have to see price elasticity studies that would rule in a jewelry item of say $125 and rule out the same one for $133,” he said. “All in all, I think the market is elastic enough to take a hit like [sales tax], and its collection will not have a significant effect on shopping behavior.”

“Large online businesses are already charging taxes for a good portion of their sales now, and rapidly more states are starting to require the million dollar plus companies to pay taxes,” said Alex Hobbit, a Lafayette, Louisiana, programmer who has worked in the jewelry industry. “I believe the new law would be a bigger deal for small businesses that are competing on price. It is difficult to say if this will drive more business to brick-and-mortar stores, but I would say it may not make a big difference. The customers who purchase in a brick-and-mortar store want the experience and face-to-face professional knowledge they can get from a jewelry salesperson [and thus may not be likely to comparison-shop online anyway].”

There were, however, some jewelers who said that their sales and business models would be affected.

“I feel strongly about this! I live and work in the state of Oregon, which is one of the only states that does not have a sales tax. We have fairly high property taxes to make up that revenue deficit, but the strong feeling here is that merchants should not have to become tax collectors,” said Gary Dawson, owner of Gary Dawson Designs in the Eugene, Oregon, area. “It is hard enough to manage and maintain a small business without the burden of increased paperwork (read overhead) that tax collection imposes. I don’t think it is inevitable that online merchants will be forced into this role…how could enforcement be implemented with online dealers operating from every corner of the globe? And a bigger question is, Why do people (merchants) allow themselves to be put into the position of shouldering an ever-larger portion of government responsibility? Just don’t buy into it. We haven’t so far here in Oregon! Radical, maybe, but for goodness’ sake, try the idea on for size.”

Added Bonnie (BJ) Rounds, owner and creator at Adornments by BJ in Franklin, Tennessee: “I am an artisan jeweler who sells her merchandise only online. Jewelry is not all the same. My line of jewelry is all one-of-a-kind, using quality materials and quality craftsmanship. I don’t charge postage, and this is a selling point that does appeal to potential customers. If I had to [collect] sales tax, I would also have to charge for shipping because I wouldn’t make a profit at all otherwise,” she says. “It’s hard to do business as an independent jewelry maker as it is. It’s hard to compete with ’big box’ stores who sell their jewelry in bulk. [Collecting] a required sales tax pretty much would make me have to stop selling online. I don’t have the money to complete paperwork, etc., that goes along with sales tax charges. All the money I have invested in materials would be for naught—I would have to liquidate my inventory and give up something I love doing. I purposely shop for materials at online suppliers who don’t charge for shipping or sales tax, either. All that would change my ability to do business online.”

The bills currently being debated in Congress, Senate Bill S1832 and House Bill HR 3179, however, do contain exemptions for sales tax collection for small businesses such as Dawson’s and Rounds’s. If both bills pass, they will need to be reconciled, so it’s hard to predict which exemption will stick:

• Senate Bill S1832 says retailers who sell under $500,000 in annual remote sales in the U.S. are exempt. (Click here to view the Senate bil.)

• House Bill HR 3179 says retailers who sell under $1 million in annual remote sales are exempt. (Click here to view the House bill.)

But, as Hobbit pointed out: “Another thing to note is that right now each state is doing its own thing as far as taxes go. In addition to some states charging taxes for items sold to their residents, some states charge taxes for all sales done on websites physically hosted on servers in their state. There are also states charging taxes for sales done through affiliates that live in their state. Amazon stopped building a large facility for their hosting service because the [state in which] they were building planned to start charging taxes for the websites hosted on those servers. The smaller websites that are not making a living are currently not being pursued, because there are plenty of large websites to go after. But I can imagine it won’t be long before the smaller companies selling fewer than a few million a year will be asked to pay taxes.”

Jim Tuttle of Green Lake Jewelry Works in the Seattle area, added some balancing comments, and a warning. “Well...as Alex says... Keep in mind that the income tax started out at 1-7% of income. Once this [online sales tax] has been in place a while, it will eventually expand to smaller sellers...it always happens.” But Tuttle also pointed out: “It is already the law for the individual to pay sales tax on online purchases, it is just practically impossible to enforce, at least for small purchases. Boats, planes, and other large items that are registered with the state are enforced already in virtually all states (try to buy a car in Oregon and bring it back to Washington State and avoid the excise tax on it).”

Tuttle, who sells enough jewelry online to be subject to the new laws right away, felt compelled to add: “On the other hand, it is only fair that everyone is taxed the same way. The few states like Oregon to the contrary, the vast majority of states have chosen to tax their citizens on their purchases. If it can be made very simple (and I am 100% sure that it can), then there is no real argument to not allow sales tax collections across state lines. It will level the playing field and we will all compete even more on our merits... certainly a good thing! By that point, all POS [point of sale] systems will offer easy solutions, and [these simplified solutions] will probably be integrated into shopping cart software and certainly into systems from eBay to Etsy.”

Indeed, as Tuttle points out, the tax collection task can be simplified—and has been. Already, 24 state legislatures have created laws agreeing to conform to the Streamlined Sales and Use Tax Agreement (SSUTA), an agreement hashed out by governments and the business community. The SSUTA not only simplifies sales and use tax collection, it minimizes costs and administrative burdens on retailers that collect the taxes, particularly retailers who operate in multiple states.

The bills currently in the U.S. Congress, in fact, will authorize only states that have joined the SSUTA to require merchants to collect sales taxes. Other states are allowed to require retailers to collect the taxes only after their governments begin enacting simplification measures. For more information on the SSUTA, click here.

To link to a page where you can find your Senators and Representatives and send your views to them on the issue of sales tax fairness, click here

To join this and other MJSA discussions on LinkedIn, click here.

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