The Taxman Will Come To The Web

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The one group of people who were almost as happy as the retailers by the unexpectedly strong Black Friday sales were tax collectors whose appetite for taxing online sales grows stronger every year.  It’s easy to see why.

According to the National Retail Federation, more than 106 million Americans planned to shop on Cyber Monday.   Forrester Research estimates that ecommerce sales will hit $172.9 billion in 2010, about 8  percent of total retail sales.  That figure is expected to rise to $191.7 billion in 2011.  Now, consider what’s happening to tax revenue.

The federal budget deficit tops $1 trillion.  Moreover,  state and local governments are hurting too.  According to the Center on Budget and Policy Priorities, state tax revenue fell 8.4 percent in the 2009 fiscal year and an another 3.1 percent in 2010.  Many local governments are awash in a sea of red ink and have laid off police officers and teachers to balance their books, which unlike the federal government they are required to do.

Lawmakers made the Internet basically a tax-free zone in 1998 and extended the law in 2007.   The theory behind it was that the then-nascent Web needed a nudge from Uncle Sam for people to adopt.  Fast forward ahead about a billion technology years and look at the result.  The web is so ubiquitous that people surf the Internet while they are in the rest room.  In other words, behemoths such as Inc. (NASDAQ:AMZN) are not going to fall into the abyss because they have to collect sales tax.   Though collecting it would be a pain, it is far from an insurmountable challenge.

Moreover, states are eying ecommerce sites as a potential source of revenue, moratorium or no moratorium. Amazon said in October that it received a bill for uncollected sales taxes from the state of  Texas for $269 million.    The Seattle-based company sniped that the state had not provided adequate justification for its bill.    Clearly, the company is worried about potential tax issues.

Here’s the company’s position in its latest 10-K:

Currently, U.S. Supreme Court decisions restrict the imposition of obligations to collect state and local sales and use taxes with respect to sales made over the Internet. However, a number of states, as well as the U.S. Congress, have been considering or adopted initiatives that could limit or supersede the Supreme Court’s position regarding sales and use taxes on Internet sales. If these initiatives are successful, we could be required to collect sales and use taxes in additional states or change our business practices. The imposition by state and local governments of various taxes upon Internet commerce could create administrative burdens for us, put us at a competitive disadvantage if they do not impose similar obligations on all of our online competitors and decrease our future sales.

The same people who argue that the Internet should be tax-free say that the government should stay away from non-profits such as colleges and hospitals.   Unfortunately, local governments are trying to squeeze more out of these institutions as well.  They cry poverty but those with presidents with seven-figure salaries don’t make a persuasive case.

Ecommerce companies need to accept that the tax man is coming.  It’s not a question of “if” but “when.”

–Jonathan Berr