The Cloud Makes Online Sales Tax Collection Simple and Cheap, Lawmakers Say

The Marketplace Fairness Act intends to modernize a precedent set by the Supreme Court’s 1992 decision, in Quill Corp. v. North Dakota. The justices forbid states from requiring out-of-state businesses to charge state sales taxes due to the burden of compliance with varying state sales tax rules. But proponents of S-1832 said advances in technology over the past 10 years have decreased the burden of monitoring and calculating the complicated network of interstate and intrastate sales taxes.

The biggest change comes from the development of cloud technologies that decrease the cost of implementation, said Bruce Krumlauf, product line manager for indirect sales tax solutions at CCH. His company offers the CorpSystem Sales Tax Office (STO), a software-as-a-service product that automatically calculates a consumer’s sales tax information based on their ZIP code. Rather than purchasing expensive in-house tax calculation solutions, companies can adopt low-cost third party tax calculation services over the cloud, he said. “Cost is definitely going down and making it more available to smaller companies.”

The cloud has made the world “a radically different place than it was 10 years ago,” said David Campbell, CEO and founder of FedTax, an online sales tax calculator. Now online sales tax calculation is both “easy and cheap ... we can return a rate for any region in 10 milliseconds,” he said. “State and local taxes are complicated,” he said. There are tax jurisdiction rules that change, different sales taxes on different products and taxability rules which are based on sales tax holidays, he said: “We keep track of all of that.”

The author of the Marketplace Fairness Act, Senate Majority Whip Dick Durbin, D-Ill., touted the bill as a way to “help states and counties balance their budgets without raising taxes and without adding a dime to the federal deficit,” in a speech Tuesday at the National Association of Counties Conference. “States need the money they are owed in order to avoid raising taxes or making painful cuts that will slow their recovery or harm their economic future.” In 2012, states are looking at a combined shortfall of nearly $106 billion, according to a report by the Center on Budget and Policy Priorities (http://xrl.us/bmxdv6). States will also lose an estimated $23 billion in uncollected sales and use taxes in 2012 if the laws are not changed, Durbin said.

Indiana State Sen. Luke Kenley (R) said if the bill was passed, Indiana would pick up “somewhere between $150 million to $250 million a year in additional sales tax collection.” Kenley said the state budget is balanced but “it’s pretty tight” and such revenue would be used to eliminate the state inheritance tax, “which we think is a problem.” Kenley is president of the Streamlined Sales Tax Governing Board, an advocacy group for online sales tax collection.

The measure would even the playing field for brick and mortar retailers who are struggling to compete with online retailers that do not collect sales taxes, Kenley said. “All you have to do is go into a Best Buy, watch a customer go in there, take 45 minutes of the clerk’s time to get the explanation on every single piece of equipment and then go to their phone and order it online while they are standing right there in the store.”

In December, Congress chided Amazon for its “Price Check” mobile application that scans bar codes from retail store items and instantly compares them with Amazon’s online database of products (WID Dec 12 p5). Senate Small Business Committee Ranking Member Olympia Snowe, R-Maine, called the app an “attack on main street businesses.” Amazon, which was once an opponent of online sales taxes, has since endorsed the Durbin bill and said new technologies make sales tax collection “far easier, almost trivially easy” (WID Feb 14 p5).

Outspoken opponents of the bill like eBay and Overstock protest the undue burden they say it would place on most small online retailers (WID Dec 1 p1). “It’s bad policy to do anything to increase the sales tax burdens on small businesses,” said Brian Bieron, eBay senior director-federal affairs. “Exempt small business, they are the least able to comply, they will be most harmed by the change, they aren’t causing the problem, and we want to be able to promote small retail business growth because they provide tomorrow’s competition to big retailers.”

Overstock General Counsel Mark Griffin said it’s technically difficult and costly for businesses, particularly small businesses, to implement sales tax calculation software into their operations. “The software companies say that their products are cheap and easy to use [but] that has not been our experience,” he said. “They don’t tell you about the implementation costs and challenges with retrofitting the checkout on your websites and interfacing it with their software.”

NetChoice Executive Director Steve DelBianco agreed: “The complexity comes when I take the tax rate and plug that into my internal, often homegrown billing system,” he said. “And it becomes doubly complex when I have to do a customer refund, partial credit, a backorder or an exchange. All of those exception handling processes all have to be wired into the free look-up software that everyone seems to be focusing on.”

But S-1832 already provides an exception to small online sellers with less than $500,000 in out-of-state sales a year, Durbin said Tuesday. And for a majority of retailers there’s little technological burden, said Scott Peterson, executive director of the Streamlined Sales Tax Governing Board: “It’s just plug and play.”

As for cost, online tax calculators can be compensated in two different ways: either a customer pays a small processing fee to the calculators when they purchase goods online, or the state reimburses the calculators from a portion of the taxes they ultimately collect. “It’s charged almost like a credit card transaction fee,” said Pete Petracco, manager at Accurate Tax, which provides online tax calculator services. “I hear the cost argument but I don’t believe it is something that holds a lot of water,” he said.

Durbin said Majority Leader Harry Reid “will call our bill for a vote as soon as 60 senators sign on as co-sponsors.” The Marketplace Fairness Act has 12 co-sponsors: Lamar Alexander, R-Tenn.; Mike Enzi, R-Wyo.; Tim Johnson, D-S.D.; John Boozman, R-Ark.; Jack Reed, D-R.I.; Roy Blunt, R-Mo.; Sheldon Whitehouse, D-R.I.; Bob Corker, R-Tenn.; Mark Pryor, D-Ark.; Jeff Bingaman, D-N.M.; and Ben Cardin, D-Md.

The legislation has wide support, including from the Consumer Electronics Association, the National Governors Association, the National Conference on State Legislatures, the National Conference of Mayors, the National League of Cities, the Governing Board of the Streamlined Sales and Use Tax Agreement, the Retail Industry Leaders Association, the American Booksellers Association, the International Council of Shopping Centers, the Retail Merchants Association and conservative groups like the Tax Foundation and Americans for Job Security.