NEW YORK (AP) — Small business owners may be closer to losing an advantage they've enjoyed during the e-commerce boom — being exempt from collecting sales tax in states where they're not located. And they're worried they will have to spend more money in the process.
Under federal law, a state or local government cannot force a company to collect sales tax on a purchase unless the business has a physical presence in that state. The physical presence could range from an actual store to an office, warehouse or distribution center. The sale could be conducted online, over the phone or through mail-order.
The arrangement saves money for shoppers who use price comparison websites or mobile apps, and those who spend time surfing for the best overall deal.
But Washington lawmakers currently have several bills in the works that would end all that by forcing companies to collect the tax. Businesses are split over the issue.
On one side are small retailers who say they wouldn't be able to bear the costs of collecting the tax and filing reports and tax returns the states and local governments require. They're worried that they'll have to buy software, hire staffers and deal with the continual hassle of keeping up with collecting tax from states and thousands of municipalities.
Headsets.com, for instance, might have to hire two staffers to handle the administrative work if what's called remote tax collection becomes law, says CEO Mike Faith. The company has operations in California and Tennessee, but sells to all 50 states. Currently, federal law only requires the company to collect tax in those two states.
Faith expects the law would force him to hire workers to help his San Francisco-based company comply with it.
"It's useless employment. It doesn't add value to the company," he says. "It's just another cost burden."
On the other side are in-state sellers and larger retailers with physical locations dotted across the country who sometimes lose business to competitors who don't have to collect the tax. Even if two retailers charge the same amount price for an item, many shoppers choose the seller that doesn't collect taxes to reduce their overall cost.
"It's a problem that needs to be addressed. It's an un-level playing field," says David French, a lobbyist for the National Retail Federation.
And on yet another side, are the state and local governments which stand to collect billions in uncollected revenue if a bill makes it through Congress. States have wanted the tax money for decades and are particularly anxious for it now because their tax revenue is down following the recession and the housing crisis. The payoff could be substantial. In 2012, there was much as $11.4 billion in uncollected taxes on Internet sales alone, according to an estimate by researchers at the University of Tennessee.
DECADES-LONG DESIRE FOR CHANGE
State and local government officials have wanted to change the law for years, even before the catalog boom of the 1980s and the Internet boom of the '90s.
Small business owners have resisted along the way. They argue that the burden of keeping up with the estimated 15,000 different sales tax rates charged by the 7,500 to 9,600 jurisdictions made up of states, counties, cities and towns, is just too much.
They have a point. Knowing how much to tax, and where, can be complicated. For example, Elgin, Ill., a suburb of Chicago, is located in two counties, Cook and Kane. In Cook County, Elgin's sales tax on general merchandise is 9.25 percent. In Kane, it's 8.25 percent. The state's base sales tax is 6.25 percent.
What is taxed also varies widely. In Massachusetts, baby oil is tax-free, but baby lotion and powder aren't. In states including New York, there's a tax on shipping charges on items. Others, including California, don't charge if you get merchandise delivered by the U.S. Postal Service or delivery services like UPS and FedEx.
The effort to change the law intensified as the growth of the Internet increased and companies' out-of-state sales volume swelled. Many sellers felt protected by a 1992 U.S. Supreme Court ruling that states could not force out-of-state sellers to collect sales tax. But the court, in effect, invited Congress to create a law that would give the states the authority to require that taxes be collected.