Taxes Won’t Kill E-Commerce (Part 2)

In Part 2 of this special report, the E-Commerce Times continues to examine why an increase in taxation of online sales is all but inevitable.

To return to Part 1, click here.

Giga Information Group research leader for e-business Andrew Bartels said the government should be able to easily address concerns over how sales tax collection changes would affect smaller online businesses.

For example, regulations could be made to apply immediately only to companies taking in more than $500,000 in annual revenue. This would give smaller companies more time to initiate changes.

The cost of software that synchronizes and calculates taxes based on varying state rates is expected to come down as more companies market the software, according to Bartels, who said that companies should not have to pay more than 1 percent of annual revenue to maintain revised tax calculation systems.

Change in the Air

According to Forrester Research, the writing is on the wall regarding the sales tax issue. The research company projects that Congress will give states remote taxing authority by 2005.

In a research brief released October 24th, just after the moratorium’s expiration, Forrester analyst Jeremy Sharrard cited three principal reasons for the projection. First, power has shifted in e-commerce, as pure-play retailers have fallen by the wayside and multichannel e-tailers such as Wal-Mart have gained clout.

“Clicks-and-mortar retailers favor extending tax responsibility to remote sales, which makes Congressional action to do so more politically possible.” Sharrard said.

Stakes Rising

A second factor is that the tax collection burden is shrinking. Sharrard said that policymakers have been reluctant to burden retailers with the added costs of collecting taxes across 7,500 jurisdictions, but technology advances and state tax reforms have changed the equation.

The third issue prompting the projection is the states’ rising tax stake. By 2004, Forrester said, states will forgo as much as $11 billion annually in uncollected e-commerce sales taxes.

“States that rely heavily on sales tax revenue will increase pressure for authority to collect taxes on all remote sales,” said Sharrard.

Bracing for New Landscape

Rather than treat the moratorium as some kind of permanent shield, Sharrard said, all parties must prepare for the inevitable changes. Forrester recommends that retailers budget for integration of databases across Web sites and physical stores.

Company information officers should demand hosted software services that allow businesses to keep current on all state tax rate changes, Sharrard said.

Forrester also said governments should roll tax programs into business-focused portals that are already dealing with companies on a regular basis, such as sites for permits, licenses and environmental compliance filings.

Nervous Climate

In the climate that has arisen in recent weeks, says Gartner Dataquest principal analyst Ron Cowles, it was inevitable that states would rev up their push for a share of what is expected to be rising e-commerce revenue.

In the short term at least, online buying is likely to increase as consumers become more concerned about leaving their homes to go shopping in crowded places. If brick-and-mortar stores are hurt by this trend, state and local budgets will likely feel more pain, Cowles noted.

Even prior to the current situation, however, Cowles said e-commerce had already reached the point where it was time to remove protections devised in its formative days. He told the E-Commerce Times that he would question the soundness of any e-commerce company that relied mainly on tax protections to stay in business.

It may just be a matter of when, but experts say online shopping is going to be treated like offline shopping when it comes to taxes.

“It won’t kill e-commerce,” Cowles said. “It will only hurt you if you had a bad business plan to begin with.”

1 Comment

  • Well, right on. The sales tax issue has been one that has been, I believe, perpetuated by those that thought the Internet was different from other forms of marketing when, as you and I know it, it is not.

    First of all, any sale outside of the state the business has a presence in does not have to pay the sales tax anyway. What all the hullabaloo does, and the federal law that prohibits sales tax on Internet sales, is say that sales made within a state does not pay the sales tax.

    What the Internet firms did not want to have to do is the paperwork that goes with paying a sales tax. It is not a case of confusion because states with sales tax do not all have the same rate because one only has to pay the tax of the state they are in.

    The only thing that might cause confusion is the definition of what state someone is in if the service or ISP is not in the state the firm is housed. This may need defining and until this is determined, then I think the prohibition for sales taxes on Internet sites is fine. But, once defined, then the prohibition should be dropped.

    Alan J. Zell, Ambassador Of Selling

    [email protected]

    A member of cadre of speakers, coaches, and trainers.

    Winner of the Murray Award for Outstanding Achievement in Sales & Marketing

    Chairman, PNW Sales & Marketing Group

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