Online Sales Tax: Can Retail Make a Level Playing Field?

by RaeAnne Marsh

roundtable_0512Online sales tax “is a different political issue now than it was 15 years ago,” says Kevin McCarthy, president of the Arizona Tax Research Association, a statewide taxpayer organization that represents Arizona individuals and businesses. Then, online sales tax was viewed as a hindrance that would cripple the Internet; now, it’s the center of a debate on what many view as a huge inequity — and a potential source of revenue for governments in fiscal duress.

“From national projections of online transactions occurring, it could be a significant amount of revenue,” says Christie Comanita, a manager in the Tax Policy and Research Division of the Arizona Department of Revenue. At the same time, she admits the state has no real way of knowing how much is actually transacted or if it is getting the tax on those sales. Simplifying the transaction (sales) tax is a move many believe would help pave the way to an online sales tax, and Comanita says, “At the executive level [of Arizona’s government], there’s a desire to simplify our transaction tax.”

The Streamlined Sales Tax Project is a nationwide effort on the part of the private sector and revenue officers to simplify sales tax systems, especially for online commerce. While its members are still waiting for the green light from the federal government or the courts to tax Internet sales — which would be a move away from a court ruling in the pre-Internet days against collecting sales tax on catalog sales — the SSTP is generally regarded as a unified approach that has the best chance of success. Although Arizona is not a member of the SSTP , Comanita says the state monitors it, and actions to simplify Arizona’s sales tax system “would give the state the option to either join or implement [its own] minimum simplification requirements.”

Dennis Hoffman, Ph.D., professor of economics at ASU ’s W. P. Carey School of Business, calls Arizona’s sales tax system “one of the most confusing and complex cobwebs of differential government taxes.” This, he explains, is the difficulty online retailers face. There are state, local, county and district taxes, and the sales tax is assessed on different things differently across these jurisdictions.

Michelle Ahlmer, executive director of the Arizona Retailers Association, says the oft-cited case law on catalog sales found it was too hard for businesses to look up taxing jurisdictions, but notes that the same technology vendors are using today to sell their merchandise also makes it possible for them to look up those taxing jurisdictions.

In Arizona, the merchant’s requirement to collect sales tax depends on whether or not it has nexus in the state, and Comanita says the Department of Revenue considers a number of factors to determine if such nexus exists. These include the interrelationship between a business’s brick-and-mortar and online entities, such as whether a customer can buy an item online and return it to a store, whether store coupons can be redeemed at either site, and whether the business uses the same promotional flyers for both entities. (Best Buy, whichoperates in such a fashion, declined to be interviewed for this story.) The Department also looks at whether the business’s actions help create, market and enhance the seller’s market into the state, such as “if part of the promotion is to say, ‘Because we have a warehouse here, you get it delivered faster,’” Comanita explains.

A company that does business online-only in other states as well as Arizona may be able to argue it has no nexus here, but Ahlmer notes that one of the Arizona Retailers Association members, which sells online only, is an Arizona business and therefore collects sales tax for Arizona residents. “We need to redefine what retail is,” she says, observing that warehouses, distribution centers and fulfillment centers are retail operations now. “Operations of retail have changed dramatically, and our
statutes haven’t kept up with the definition or taxation.”

“Economics suggests you want tax fairness, not create distortions that encourage buyers to go from one establishment to another to avoid paying a tax,” says Dr. Hoffman, and asks, “Why put warehouse jobs above regular retailer jobs?”

An economic impact study the Arizona Retailers Association commissioned from Elliott D. Pollack & Company found the state lost 5,000 jobs in the period from 2006 to 2011 due to the sales tax “loophole” and predicted the number would escalate to 8,000 by 2015. Noting that year-over-year sales growth of online businesses is 16 to 19 percent compared to 8 percent for mainstream retail, including those with an online component, Ahlmer says, “We don’t expect all sales to return to brick-and-mortar if there was a similar requirement for online to collect sales tax, but we do expect one in four to return.” And this, she notes, would impact jobs in Arizona.

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