Federal Legislation for Out-of-State Online Taxes Appears Imminent

Nationwide, state revenues are down and interstate tax confusion is high. When it comes to regulation on web sales, it has lately been an “every man for himself” situation out there, with many states passing their own in-state online sales tax laws, some onboard with recently proposed federal laws, and some still not quite satisfied.

With bills now in the House and Senate, it looks like Congress is getting serious about solving the out-of-state online sales tax issue. While these particular bills may not be the final law, it seems likely the issue will be solved in the next year.

The recent activity in California, mandating that out-of-state online retailers with over $500,000 in sales collect sales tax, shows that state governments are getting serious about finding a solution, and small concessions from steadfast online tax opposer Amazon indicate that a comprehensive agreement is likely on the horizon.

Amazon had successfully opposed and fought similar laws in other states, so its compromise to California (and then a similar concession in Tennessee) was surprising.

Or was it…

Amazon is clearly jockeying for the best solution to the online tax dilemma. As the world’s largest online retailer, Amazon is a smart company, and they are showing off their skilled moves. Yes, they agreed to compromise on the tax laws passed by California and Tennessee, but they negotiated an extension on the deadline to comply in exchange for building several new distribution centers in the states. In the meantime, they are lobbying for federal online sales tax legislation.

In a subsequent strategic move, clearly in anticipation of definitive federal regulation on the matter, Amazon announced plans to expand their merchant tax collection service early next year. For a small processing fee they will collect taxes for their merchants. This service will serve two purposes—help current and prospective merchants negotiate tax collection once federal legislation is passed, and, possibly, offset some lost revenue.

So it seems that Amazon believes that online taxes are imminent. But what will this mean to most retailers?

Surely an adjustment will be felt in the overall retail marketplace. Online tax legislation is one of Shopatron’s 10 Reasons eCommerce Will Change Life for Brands and Retailers in 2012.

Some studies indicate online retailers may experience a temporary ding in sales, particularly on higher ticket items, but that the convenience offered by shopping online will eventually bring shoppers back, tax or no tax. As we know, convenience is still reported as the #1 reason for buying online, even more than price.

On the brick-and-mortar retail side, the positive effects are projected to be more and longer lasting. A study by the University of Cincinnati found Ohio could add 11,000 jobs if a law was passed requiring out-of-state online retailers to collect sales taxes.

A level tax playing field will take a subsidy away from online retailers and that will be beneficial for brick-and-mortar retailers. Brands, like those on Shopatron, that integrate their online sales with their retailers will find that strategy even more effective as the lines between online and offline sales continue to blur.

Like it or not, taxes are coming to all of your online orders. Soon it will be time to compete using old-fashioned tools like merchandising, customer service, location, convenience and brand.