Online Sales Tax Policy

3179 words (13 pages) Essay

24th Jul 2017 Politics Reference this

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Intro

As the past several years majority of the retail item purchase are transitioning to the internet, which cause more fiscal distress for the states because they weren’t able to collect taxes for sales generated online from outer states that are not physically presence in the state. The Amazon laws often reference by the attempt by the states to capture taxes on internet sales are being wildly adapted to capture the uncollected revenue for the states. The Market Place Fairness Act (Amazon Tax) arise recently to authorize states to impose internet sales tax if the states are member of the SSUTA. However major states like California and Illinois s are still resisting these Amazon laws to be implemented. So far only 20 states collect sales tax from internet retailers. This is a problem because these Amazon laws has been proven to decrease employment in the online retail market, decrease business investment and create future monopolistic problem. Last year Amazon spends 1.8 million dollars hiring seven law firms to lobby Washington, hiring 9 lobbyist from each firm to fight this issue in the congress. In addition to these lobbyist also recruited two senate majority leader Trend Lott R-Miss and former Sen John Breaux, D –LA. Amazon is among at least 135 companies and group that have lobbied for sales tax bill this year. Their interest is to abolish these sales tax law so these online retail companies can gain competitive advantage against local retail stores and increase their company’s revenue. The key opposition actors are the Department of Revenue from each opposing state and certain congressman who wanted to collected these sales tax which estimated to be more than 10 billion each year and will continue to grow in the next 5 years. The major disagreement is about the definition companies’ physical presence in the state and if tax is necessary from conducting sales from outside state. The major agreement is that there needs to be quick and firm action to set up these policies because the numbers of online retail stores are growing and the policy needs to be in place to prevent confusion in the future. Well established corporation giant like Amazon and other Big online retail stores are most likely to influence the decision in the policy making process because due to their size, employment effort and political lobbying effort, their interest is most likely going to be recognized.

Journals

The first journal that we are going to examine is the evidence of how online sales taxes influences buyers’ behavior using the data source of 25000 people, the results shows that taxation plays an important role in online commerce. Especially for people living in places with higher taxes, those shoppers are much more likely to buy things over the internet. The results shows that there is a reason why there is such a different level of technological sophistication and shopping behavior with different locations. With this study, existing sales tax to internet will reduce the number of online buyers by as much as 24 percent. In total the results of this study shoes that taxes and prices difference is the main factor of purchase decision, and important role for individual floating money to other systems and people migrating to other states or even other countries, thus creating a world without borders.

The second research journal is from Stanford also examine the sensitivity report of Internet retail market. The first results in this paper shows a “tax surprises”. The study found that interested buyer falls roughly two percent for every one percent point increase in sales tax. The sensitivity changes depend on the type of item there is . The second report uses sales tax at the state level. Where one percent point increase in states sales tax will lead to 3-6 percent decrease in line purchase form home state sellers.

Analysis

The Market Place Fairness Act is the currently status quo. Where it grants states authority of collect online and catalog retailers, no matter which state they are located, to collect sales tax at the time of the transaction. It is the exact same process that local retailers are required to do. However there is a catch that the States must simplify their sales tax laws to make those tax collection. The State has an option to join the twenty four states that have adopted the Stream Sales and Use Tax Agreement. Or another option would be that the state establish a uniform sales tax base throughout the state and determine sales tax rate of out of state. The reason why this Act was implemented because retail has drastically changed from forty six years ago. Majority of the online sales are shipped from tax exempt state and therefore allowed to be tax free. In order to fix this issue of a tax “loophole” and also, increase tax revenue, the act was set up in place.

The majority stakeholder of this policy is the Department of Revenue from each state. Where due to increase cost and increase in unemployment the states are unable to find new revenue source to collect from. By implementing this policy the State is able to collect 300 plus million dollars each year. On a national level, the total tax revenue from this bill will come out to 23 billion.

Another major stakeholder of this policy is the National Retail Federation. Which is made up by large retail businesses such as Walmart, Target and BestBuy, Where the company operates with physical presence in the State. The National Retail Association argued that without an online sales tax it will create and unfair competitive advantage for the online retail business and causing lost revenue from its store. Traditional brick and mortar businesses view this as a tax loophole

The second policy is no online sales tax for companies who do not have a physical presence in the states. There are several reason why people favor this policy. First online sales tax is deem unconstitutional and serves as an discrimination against online businesses. According to Illinois Supreme court “Justice Anne Burke, writing for the court’s majority, questioned whether there was any substantial difference between out-of-state businesses reaching Illinois consumers through a click-through-nexus approach or through other approaches that aren’t taxed. “The click-through link makes it easier for the customer to reach the out-of-state retailer,” Burke wrote. “But the link is not different in kind from advertising using promotional codes that appear, for example, in Illinois newspapers or Illinois radio broadcasts.”

The second reason why people oppose having online sales tax is because, the Market Fairness Act forces business to collect taxes on their own expense. Small business are already suffering low profit margin in online market, if the States requires online business to collect taxes it will drastically make the tax collection process difficult.

The main stakeholder for this policy is the Internet Association Group. The group is made up by internet companies like Amazon, Facebook and Ebay, where they are conduct business online rather than having a physical retail store.

The third Policy is a modify policy for the Market Place Fairness Act. Where the States only collect online sales taxes with company that is generating more than 1 million revenue per year. The design of this policy is specifically made for small business. Because collecting sales tax clearly hurts sales. The government wants to exempt small businesses from having to collect any online taxes, therefore making the crowded online retail market place more competitive friendly.

The major stake holder for this policy is the small online business, where they are generating small margins of profit from their online sales. This tax exempt will help small business to take off in a competitive business world and exempt from the tedious work of tax collection for the state.

 

Goals

Impact category

Internet sales tax

No Internet sales tax

No Internet Sales Tax for company less than 1,000,000 Revenue

Goal

Collect Online Sales Tax

Number of Non-store retailers (Internet store with no physical presence)

47500

0

0

   

Number of States will be collecting Internet Sales tax

45

23

23

   

Total online retail Revenue

360 Billion

360 Billion

360Billion

   

Number of Digital shopper US that will be effected

215 Million

215 Million

215 million

Goal 2

Internet Tax Revenue

Tax Revenue loss In the U.S

0

23BIllion

21 Billion

Goal 3

Employment

Number of Small business left

     
   

Due to establishment Sales Tax State of Illinois

9000

0

9000

   

Online Retailers who terminated

1000

0

1000

   

Advertisement agreement with States that have Sales tax

     
           
  1. From this chart we can clearly point out the motivation behind Amazon Tax, the Department of Revenue is clearly losing 23 billion dollars every year for online sales tax that are not collected.

Actors

Motivation

Beliefs

Resources

Department of Revenue

Collect tax revenue

Tax Loophole

State Power

Internet Association (Amazon, Ebay. Groupon. Overstock.)

Cost

Discrimination

Unconstitutional

Competitive Advantage

Consumer

Lobbying

Power.

Media. Employment

Retail Merchant Association (Walmart. BestBuy. Target)

Collect Taxes Competitive advantage

Unfair advantage

Tax loophole

Lobbying Power

Media

Employment

Performance Marketing Association.

Online Affiliates

Cost Advantage

Competitive Advantage

Discrimination

Lobbying power

Employment

Media

Congressman Stephan Allen Womack (R)

Collect tax revenue

Tax loophole

Sales Tax vs Income Tax

Vote

Council Member A (Democrat)

Collect tax revenue

Tax Loophole

Increase Revenue Fair Share

Vote

Council Member B

(Republican)

Increase Jobs

Business Innovation

Discrimination Hurts job growth Competitive Advantage

Business Innovation

Consumers benefit

Vote

The policy that I’m prescribing is policy number 2. Where this policy only require companies to pay taxes with physical presence in the state. Because I deem policy 1 and policy 3 unconstitutional and it’s a devastation to our economic well-being.

Political Reason

On October 19th 2013 the Illinois Supreme Court found the Market Place Fairness Act unconstitutional. It is unconstitutional because the court “find that there aren’t any substantial difference between out of state businesses reaching Illinois consumers through click through nexus approach or through other approaches that aren’t taxed. The coupon, discount and other advertisement link is no different from for example, Illinois newspaper or radio broadcasts.”. Under the Internet Freedom Tax Act States are prohibit to impose discriminatory internet only taxes on E commerce. So this policy should not even be raised up because it is unconstitutional in the first place.

Furthermore, Amazon and other online retail companies do sales taxes on states that they have physical presence, therefore making the argument of “Amazon pays no sales tax” Invalid.

The Trillion Dollar Reason

Let’s examine the economic impact of this policy. Every year Amazon and other online retail companies invest billions of dollars into its supply chain management systems and information management systems. This costly investment is what makes online shopping more efficient, less costly than any other method in the retail world. If local government propose a sales tax on online sales, not only it decreases online sales, it also provides no incentives for small businesses to compete with physical retail stores because small businesses have no price/ logistical advantages compare to the physical retail store. Decrease in sales and fewer small businesses will lead to less investment into building warehouses, data centers, and transportation system and website development. Which will be the next trillion dollar industry.

As a side note, because Amazon pays no sales tax. Traditional brick and mortar stores are force to increase its presence online, decrease cost of its product, decrease inefficient warehouses, hire more website/data/cloud developers and improve its delivery system. The benefit not only transition to the customers (reduce purchase cost) it also provides more job opportunities for people by introducing business competition.

Employment

When the State of Illinois tries to pass the Illinois Affiliates Law which required out of state online company to collect taxes on its affiliates. 1000 online retailers threatened to terminate their business relationship with the state. 9000 small business were lost. This example shows us that when a state tries to impose an internet sales tax, companies will terminate their relationship with the local affiliates. Not only this will cause less income for the people, it will stagnate employment in the future. The similar approach to terminating its affiliates will be found more if states continue to impose sales taxes on internet retail companies.

Long term vs Short term

Short term

  • Step 1.

To fix this issue first we need to repeal every Amazon Tax that is being implemented in states that collect Amazon Tax. Using Illinois Supreme Court’s findings and conclusion, I suspect that other states court will soon find this tax is unconstitutional and discriminating towards the online retail companies. By rejecting this tax, customers can enjoy no sales tax from online companies that do not have a physical presence in their state.

  • Step 2.

To further fix this issue in the short term, we need to fix issues mainly in the Department of Revenue. Right now due to the rising cost of welfare, Medicare and other cost, Department of Revenue is running out of budget on hand. To tackle this problem in the short term, there are several other polices that decrease spending in some area that are not efficient in the federal system. By convincing legislators that businesses are the future source of revenue for the government, our legislator can look elsewhere to decrease spending or transfer spending to other department.

Long term

To see the implication of my policy to work and to solve the root cause of the problem in the long term, we need to tackle the traditional brick and mortar businesses. By introducing competition from online retail stores, the brick and mortar businesses will have to increase its presence online and invest in online retail business. Walmart actually sees an increase in profit online since it starts to increase its presence online. Walmart is also adopting its inventory, transportation, online retail strategy from Amazon.

In the long term, Walmart and other brick and mortar businesses will be able to price match with Amazon and also offer low cost goods and great online services to its customers. When we see traditional brick and mortar business adopt an online retail model, the issues of sales tax will not be surface.

Sales Tax

The root cause of the problem is actually the existence of sales tax. To fully see this problem go away, we need to examine the real purpose of sales tax in the long term. Should sales tax be implemented? Do states perform better without sales tax? Do sales tax hurt traditional brick and mortar business as well? Is Department of Revenue the sole winner of implementing sales tax? These are the issues that needs to be address in front of the legislator in order to abolish sales tax. By abolishing sales tax, the question of online tax will not be an issue anymore.

Journals

Alm, James, and Mikhail I. Melnik. 2005. “Sales Taxes and the Decision to Purchase Online.” Public

Finance Review 33 (2): 184–212.

Alm, James, and Mikhail I. Melnik. 2005. “Sales Taxes and the Decision to Purchase Online.” Public

Finance Review 33 (2): 184–212.

Mikesell, John, 1970. “Central Cities and Sales Tax Rate Differentials: The Border City Problem.” National Tax Journal 23 (2), 206–214.

Mikesell, John, 1971. “Sales Taxation and the Border County Problem.” Quarterly Review of Economics and Business 11 (1), 23–29.

Rohlin, Shawn, Stuart Rosenthal, and Amanda Ross, 2012. “Tax Avoidance and Business Location in a State Border Model.” Unpublished manuscript. Maxwell School, Syracuse University, Syracuse, NY.

Articles

“Studies Agree: A Sales Tax Increase Kills Jobs – Watchdog.org.”Watchdogorg RSS. Web. 4 Dec. 2014. <http://watchdog.org/36650/ks-studies-agree-a-sales-tax-increase-kills-jobs/>.

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