The War over Taxes and Online Retailing

Ebay

While checking over my inbox this morning, I was surprised to have received an email from John Donahoe, CEO of the online marketplace retailer eBay. I wasn’t the only one to receive this email; it was apparently to sent to all 40 million or so of eBay’s American users.

In this email, Mr. Donahoe warned users of new impending legislation, The Marketplace Fairness Act, the purpose of which is to allow states to collect taxes on sales by internet retailers based in other states. Mr. Donahoe argues that this new taxation on online businesses with over $1 million in sales would severely hurt small online businesses.

This appears to be a large push by eBay to recruit users in a lobbying effort to combat this new law. But why?

Let’s wind the clock back a bit first. In 1992, the Supreme Court ruled a case known as Quill Corp. vs. North Dakota. The opinion of the court was that Congress has the final say on interstate commerce, as indicated in the Commerce Clause of the US Constitution. Therefore, unless Congress permits it, states can’t force out-of-state reailters to pay taxes on sales to thier residents. Retailers had to possess an in-state presence in order for the states to collect taxes.

The problem is that things have grown more complicated these days. As The Economist noted in a recent article:

Since 1994, mail-order and internet sellers have grown from 2% of total retail sales to 7%. In the past five years, while retail sales have risen by 10% and total state and local taxes by 9%, sales-tax revenue is up just 2%. The National Conference of State Legislatures reckons that the [Supreme] court’s prohibition cost states $23 billion in lost taxes last year.

Naturally, this is bad for states in need of revenue, especially given current tight economic conditions. The Marketplace Fairness Act is the proposed solution: it would allow states to force retailers outside their borders to pay an online sales tax with an exception made for online businesses below $1 million in sales.

eBay, which is popular with small online retailers, would take a large hit if this law came to pass. That is why Mr. Donahoe is arguing in favor of increasing the proposed exemption for small online retailers; he says the threshold should be $10 million in online sales instead of just $1 million, as well as any company with less than 50 employees.

This is where things get complicated.

Amazon.com, the online retail colossus, is in favor of the proposed legislation, as it would make conditions harder for it’s (smaller) competition. If the Marketplace Fairness Act were to pass, then many of these competitors would either pay more in taxes, be forced to quit, or be absorbed into Amazon’s own marketplace services.

That last choice would be devastating for eBay but only beneficial for Amazon. In order to get an idea why, just ask Wayne Johnson, who runs fly fishing retailer Anglers Habitat in Caldwell, Idaho. In today’s Reuters article, he and his business were mentioned, with the following being explained:

If the legislation passes in its current form, Johnson said he would re-organize his business to get annual out-of state online sales below the $1 million threshold.

That would involve laying off most of his staff, which currently consists of eight full-time employees and an accountant, he said.

More worryingly for eBay, Johnson said he would start selling through Amazon’s marketplace because Amazon handles warehouse storage, order fulfillment and shipping.

Amazon charges extra fees for these services, meaning Johnson’s business may be less profitable, but he said he would be able to keep running the online operation with very few staff.

As such, we are faced with a hard choice: on the one hand, states do need to collect these tax dollars in order to keep on functioning. After all, who else is going to pay for sewage works and the like? On the other hand, these new taxes could potentially hurt small businesses while giving further power to an already enormous business giant.

Either way, expect this story to remain in the spotlight for the next few days.

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