ARTICLE

Act could level the field for online sales tax

"You only have so many people in your area, but the country's a big place."

"While we have to play by the rules and collect sales taxes, they can sell the same thing at the same price and not have to collect any tax," Jacob Cowger says. (Cliff Jette/The Gazette)

It's been a luxury enjoyed by online shoppers since the earliest days of the Internet no sales taxes on out-of-state purchases.

Under a 1992 Supreme Court decision, states were not allowed to collect sales taxes from out-of-state sellers unless they had a physical presence in that state.

That ruling has helped seed the growth of the fastest-growing segment of the retail economy e-commerce while at the same time mostly excluding states and local governments from benefiting from it through sales taxes.

The ruling in Quill v. North Dakota also has left traditional retailers who sell products out their front door at a sales tax disadvantage forced to charge sales tax on virtually everything they sell regardless of where the buyer lives.

"It's kind of a slap alongside the head," said Jacob Cowger, who owns Balloons Etc. and the Costume Emporium in Cedar Rapids with his wife, Kimberly.

The store has struggled partly due to the competition with online retailers in costume accessories, he said.

"While we have to play by the rules and collect sales taxes, they can sell the same thing at the same price and not have to collect any tax," Cowger said. "They can sit at home in their pajamas and not have to go to work, and not have to collect sales taxes."

Mainstream e-commerce is well into its second decade of growth, long enough that heavy online sellers have built their business models around a relatively sales-tax free world. Changing that world could shake things up in a way that they say would harm the healthy e-commerce economy.

Yogi's Hot Rod Parts has a storefront in Monticello, but it does most of its sales online or via catalog. And Justin Somerville, the son of founder Yogi Somerville, likes the ability sell online without the complexity of collecting state and local taxes in thousands of jurisdictions.

"It gives us a competitive advantage out of state," said Somerville, also head of the family's Tanks Inc. business, which specializes in gas tanks.

Out-of-state sales bring revenue from larger states, he explained. He disagreed with the widespread assertion that online sellers don't have much overhead to support, and said Yogi's still brings plenty of tax revenue into state coffers not only through its direct in-state sales, but also through payroll taxes, direction employment of Iowans, property taxes and other local spending.

"We're not really competing with anyone except online anyway," Somerville said. "There are really no local hot rod stores."

Then again, many storefront Iowa retailers are hesitant to see the tax-free online sales world change because they aspire to become big online sellers themselves.

Vball Gear, a Marion sporting goods store specializing in volleyball, still gets most of its sales through the local market, co-owner Ted Moser said, but has a significant and growing online sales component.

"You only have so many people in your area, but the country's a big place," Moser said.

The Internet puts the volleyball world in the store's backyard so that a volleyball player in, say, rural North Dakota who saw the interesting kinesiology tape that Olympic volleyball players were wearing to help with their injuries could order it online from Vball gear.

"We sell all over the United States," Moser added. "When we opened three years ago, our first order was from Arizona."

Iowa has made an effort to increase its online sales tax revenues by adopting the Streamlined Sales and Use Tax Agreement, a uniform system for online sales tax collections that has helped encourage voluntary tax collections by online retailers.

The state collected around $13 million through the Streamlined Sales Tax Agreement in fiscal 2011 and expects to garner about $14 million in fiscal 2013. Much of the revenue comes from large retailers such as Target and Walmart that find it easier to comply through the streamlined system because they already have stores in virtually every state and must collect sales tax.

A recent study conducted for the National Retail Federation estimated that Iowa still loses out on about $181 million in state sales tax per year.

Victoria Daniels, division administrator for the Iowa Department of Revenue's Policy and Communications division, said the state believes the federation's estimate is too high. Among other things, she said, it doesn't account for a collection exemption for "small sellers" and for compensation the bill would require that states provide online sellers for collecting tax.

Iowa taxes retail sales at 6 percent but exempts food and prescription drugs. It also collects a 1 cent local-option sales tax in most jurisdictions.

The cost advantages of Internet sellers have forced major brick-and-mortar retailers such as Best Buy to reexamine their business model. Best Buy has become a poster child for the phenomena known as "showrooming," in which fewer shoppers come into stores to buy but more show up to examine products they eventually plan to buy online.

"People look at what they're trying to sell, and go buy it and save 16 or 18 percent," said Iowa's U.S. Sen. Charles Grassley, who recalled hearing about the problem during a visit to an area Best Buy store.

The disadvantages show up in things such as job cuts at such retailers, Grassley said, "so you can't help but have some sympathy for them."

THE FAIRNESS ACT

Legislative efforts to remedy the inequity have sprouted repeatedly without much success. One of several recent efforts is the Main Street Fairness Act.

It would help address one of the biggest objections of online retailers to collecting sales tax the complexity of trying to collect taxes from some 7,600 taxing jurisdictions with vastly different tax rates and rules.

To obtain authority to tax online sales from out-of-state retailers, the states would have to simplify their tax collection requirements or subscribe, as Iowa does, to the Streamlined Sales and Use Tax Agreement.

The law also would exempt some smaller retailers from the requirement to collect sales taxes online from other states, and apply uniform rules for things such as sales tax holidays and to address refunds.

The Iowa Department of Revenue estimated its state sales tax collections would rise to about $27 million if the Main Street Fairness Act were enacted, according to Daniels, the division administrator.

"We've been working on this for years, and this is the closest it's every been, and we think it's going to happen," Daniels said of the federal legislation.

Iowa Gov. Terry Branstad urged support for a companion bill, the Marketplace Fairness Act, in a June letter to Iowa's two senators.

In the letter, Branstad wrote that "The application of sales taxes only to 'brick-and-mortar' retailers, many of which are small businesses, puts those very entities at a competitive disadvantage."

Branstad noted that one of the largest online retailers, Amazon.com, had shifted from opposition to support of the bill "because it would allow for a predictable path forward that reflects the realities of the current marketplace."

If you ask National Retail Federation Tax Counsel Rachelle Bernstein whether the Main Street Fairness Act has a chance of passage, she has to weigh her words carefully.

"I think there is some chance," Bernstein said. "Nothing's going to happen before the elections, although the sponsors would like to have something happen."

Grassley said the main strike against the legislation is that some lawmakers have framed it as a tax increase.

"It's tied in with the Grover Norquist anti-tax pledge," he told The Gazette, referring to the conservative lobbyist's Taxpayer Protection Pledge.

Many Tea Party Republicans have signed the pledge to oppose any tax increase. Grassley didn't, but said, "I'm still kind of an anti-tax person," and would consider the change carefully.

At least in Iowa, Daniels said it would be wrong to call it a tax increase. She said Iowans who buy goods out of state for use in Iowa without paying state sales tax anywhere are legally on the hook to pay Iowa's use tax. Not by coincidence, the use tax is equal to the amount of sales tax Iowa would have collected."The tax liability is there," Daniels said, "whether people want to admit it or not."

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