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The Shop Local Fallacy

In one of the industry news pieces I did this past week was a report of Amazon challenging New York State’s intent to impose a sales tax on internet sales. A commenter indicated that this was good because it helped to encourage people to shop locally.

On the surface, this argument is compelling. Force those out of state companies who aren’t contributing to the community to pay extra to compete in the State. If you unpack that defense, however, the shop local argument falls flat. Today, more and more independent bookstores are closing their doors because they can’t compete against the larger chain stores. The idea for New York State’s tax is that by imposing a tax on internet sales the flow of consumer dollars out of the state might be quelled.

If Amazon’s challenge is unsuccessful, it is likely other states will soon follow New York’s lead. After all, why should a bookstore like Amazon have an unfair playing field against local independents?

The answer is very simple. An internet sales tax imposed in every state would create a paperwork nightmare that would essentially drive small businesses out of business. Generally, the current scheme in all states is that sales tax need only be collected for sales to residents of a state where the business has a physical presence. For example, if you ordered something from Pottery Barn but your state did not have a Pottery Barn, Pottery Barn did not have to charge you sales tax. This system makes it easy for a small business to have a broader sales base because it would only need to be responsible for remitting tax in one state. An independent bookstore that sold books online such as Turn the Page would then be responsible only for taxes for purchases made by Maryland residents.

The basis for this system is the 1992 Supreme Court decision of Quill v. North Dakota, 504 U.S. 298 (1992). Quill challenged North Dakota’s state taxation of Quill’s mail order sales. At the time, Quill was the sixth largest vendor of office supplies in North Dakota with almost $1,000,000 worth of sales made to 3,000 customers. The Supreme Court found that North Dakota’s tax violated the Commerce Clause because Quill did not have a “substantial nexus” with the state. It had no physical presence, no outlets, warehouses, offices, or even sales people. The only existence of Quill in the state was its catalog and its product when it was delivered and this presence was not enough to meet the “substantial nexus” test.

The Quill court also discussed the burden North Dakota’s tax might “unduly burden insterstate commerce.” Were the Supreme Court to ratify North Dakota’s tax, it recognized that the ruling would create “similar obligations might be imposed by the Nation’s 6,000 plus taxing jurisdictions.”

For a small business, the obligation to meet over 6,000 plus tax collection efforts, would simply be crushing. For someone like Amazon, Barnes and Noble, or Borders, it might be onerous but not something that would require them to go out of business. This means that New York small businesses will face the same increased burdens from selling on the internet as the Washington State big businesses, but the small New York businesses are less equipped to handle those increased burdens.

The consumer ends up paying for this increased burden on the businesses because as they have to increase the staff and accountants to track all the tax collection duties, the prices will have to increase to accommodate those additional operating costs.

It’s not the tax itself that is burdensome, but the collection of the tax and the paperwork that must be fulfilled for each taxing district. Unless there is some streamlined method in which the 6,000 plus taxing jurisdiction requirements can be met, any internet sales tax will hurt the small, local business – essentially the companies that are supposed to benefit from the tax-levelled playing field.

Jane Litte is the founder of Dear Author, a lawyer, and a lover of pencil skirts. She spends her downtime reading romances and writing about them. Her TBR pile is much larger than the one shown in the picture and not as pretty. You can reach Jane by email at jane @ dearauthor dot com

15 Comments

  1. Moira Reid
    May 04, 2008 @ 06:20:38

    Oh man, do I agree with this or what?! I work at a sign shop in VA, and we occasionally sell to NC and surrounding states. I had to double-check the law on this a long time ago, and Miss Jane is correct. If I don’t have a shop in those states (nope, just checked, we don’t), I don’t have to charge or file sales taxes with those states. If I did, the paperwork nightmare would suck up incredible time and resources that as an 8-person business, we just don’t have. Honestly, it’s a big enough pia with one state’s sales tax, federal 941 and income taxes, state withholding and federal withholding taxes, business income tax, state and federal unemployment tax…I’m telling you, that list is just the beginning.

    Amazon probably has an entire building of financial people doing this kind of work–I have ME. I’ll be watching this ruling carefully. Maybe it’s not to late to take up another profession to finance my writing obsession…

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  2. Jayne
    May 04, 2008 @ 08:06:57

    The state I live in collects sales tax on all internet sales but it requires the citizens to do it and it’s done on our state income tax forms. You either have to pay a percentage of your total income if you didn’t keep records or hope you kept your receipts as proof of payment.

    Of course I guess you could just blow it off but – in my tax prep hysteria each year – I imagine the Dept of Revenue people checking that line on the state returns and cackling with glee at the chance to audit anyone who doesn’t pay up.

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  3. Teddypig
    May 04, 2008 @ 09:23:49

    I think this is also a case where sure you can try and pass that law but good luck on trying to collect.

    If you are not in that state and your company does not fall under their jurisdiction then what right do they have to audit? Or will they get the feds to try and collect their said taxes?

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  4. Janine
    May 04, 2008 @ 11:14:17

    I wonder, with computer technology being what it is, if someone could design a program that would solve the paperwork problem?

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  5. (Jān)
    May 04, 2008 @ 11:21:53

    I doubt it Janine. You’re still going to have to enter in all your sales data (everyone gathers the information differently on websites, so it’s not in any kind of standard form), and then you’re going to have to read up on all the individual rules for each of the jurisdictions that you’re paying taxes in, plus you’re going to have to communicate with that government in some form. It would practically be a full-time job keeping up with it unless you didn’t have more than a couple sales a day.

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  6. Janine
    May 04, 2008 @ 11:55:24

    I was kind of thinking maybe a program that gathers sales information from customers on the website could be integrated with a program that calculates taxes based on the rules of different jurisdictions. A sort of 2-in-1 program if you would.

    The programmers would have to read up on the tax codes of different jurisidctions and keep updating the program when rules changed, but the business owners would not have to. It could be a sort of advanced Turbo Tax for internet businesses. When I do my taxes with Turbo Tax, I don’t need to know the rules because the program calculates my taxes for me.

    The communications with the government could also be printed out or e-filed by the program, as TurboTax does it.

    Now, the programmers would probably have to have some full time accountants on staff, but the program could work for many businesses so it would not be a full time job for anyone but the software designers.

    Does this sound possible or is it a pipe dream?

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  7. Jana Oliver
    May 04, 2008 @ 16:13:04

    You would still have fill out the forms and remit the sales tax for each state. Some of those filings would be monthly, some quarterly. In Georgia I have to break out sales as taxable and non-taxable. Of those that are taxable, then I have to break them down according to the state tax rate and all the other special taxes (local option sales taxes, Marta tax, etc.) based on the county where the sale occurred. Would they have to do that if someone from North Dakota bought a book in Georgia? Most likely. I can’t imagine my county passing on the extra dollars they’d get from those sales. Given the economy, it’d be a windfall. And a nightmare for those who had to do the paperwork, even if it was computerized.

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  8. MoJo
    May 04, 2008 @ 17:49:07

    Okay, I’ve been looking for something I read in the last couple of days, but I can’t find it. Gist:

    Does the fact that Amazon is now a manufacturer/supplier of retail products (i.e., Booksurge) and not just a reseller shift the advantage from Amazon’s argument to New York’s?

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  9. Laura K
    May 04, 2008 @ 18:00:54

    Janine -

    Actually, my shopping cart system (ZenCart, which is Open Source) does this for me in a limited way. When I set it up, I had to enter the various states in which I hold sales licenses and what taxes I would be collecting. It adds all those for me, and when I have to file my sales tax collected (which, in the states I collect for is annual because I don’t make enough in any individual state to have to submit more than once a year!) I export my “orders” to a database and sort them by state. It’s clunky, but manageable. I think your idea is eminently “doable” and not a pipe dream at all, but it won’t happen until more people are affected by laws like this. When/if that happens, I suspect someone will make a mint coming up with a system that streamlines everything out of your order system and plugging that info into printable forms for various state’s sales tax. I file most of my sales tax forms online (except for MA, which I still have to file in paper form), so I don’t think it’s a stretch to believe someone could create software that would collect the needed forms and collate them to fill them out from your order system.

    Like Jana, I have to break down my sales into taxable sales and non-taxable ones. I also have to keep track of the wholesale buyers’ identification numbers in case I get audited. Now, that’s a system I’d like to see streamlined!

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  10. Laura K
    May 04, 2008 @ 18:05:42

    Jayne –

    Good Grief! I would hate that. Taxes are hard enough without adding that component. I thought the laws some of the places I lived were convoluted, but that’s…Byzantine! I’d never be able to keep track…

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  11. Kaz Augustin
    May 04, 2008 @ 18:27:50

    Please feel free to correct me but I was under the impression that New York State is using the Amazon affiliates as a basis for their case, not the Amazon core business model itself. So, it’s not against internet trading per se but, rather, against those stores who have affiliate programs where their affiliates are based in New York. Such affiliates get some money (it may be pennies, but it’s still money) from Amazon and thus, NY argues, as virtual store-fronts for Amazon, Amazon should collect sales tax from the affiliates and pass them along to NY.

    This distinction is important, because a small-business independent book store, e.g., that trades across the country is not likely to construct an entire affiliate program and thus will NOT be affected by this suit. Having run a small-business independent book store years ago :) , that was my interpretation of the suit.

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  12. DS
    May 04, 2008 @ 22:21:42

    I’ve bought from one of the affiliates in New York– J & R Electronics or some similar name. They collect tax on Amazon sales to individuals in New York.

    My state has a basic state tax and then also additional taxes in different areas. The state tax is 5% but counties can add on for levies, etc. Sales tax in the county I live in is 6.5% and about 30 miles north it’s 6% About 80 miles west it is 5% Also there is no sales tax on groceries or take out food. Next state over reduced sales tax on groceries, no break on prepared food in restaurants but reduced tax in stores. 3rd state (it’s a tristate area) no sales tax on groceries, prepared food is taxed at state tax level. (Amazon sells food items I don’t know if any would fall under prepared but it could complicate things.)

    Edited to add most states have the tax where consumers pay in state taxes on any item not taxed at the time of purchase that is to be used in state. It’s called a use tax.

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  13. Janine
    May 04, 2008 @ 22:40:27

    Jana — I see. I’m not sure what should be done about it, because it seems to me that no matter how this is decided, the situation would be unfair to somebody.

    Laura K. — I’m glad to hear it is doable though I’m sure you are right that it won’t happen unless such laws affect more people. And probably by the time such a program is developed, some small busineses will have gone under.

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  14. Miki
    May 05, 2008 @ 04:15:52

    Like Jayne, the state I live in asks residence to identify any online sales (that weren’t already taxed) and declare them and pay taxes annually in my state tax return. Unlike Jayne’s, though, there isn’t any percentage-of-income penalty if you don’t keep records. It’s sort of collected on an honor system.

    It’s been in place two or three years now (I think) and the editorials get a kick every year commenting (tongue-in-cheek) on how few people in our state shop online!

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  15. Amy T
    Apr 08, 2009 @ 13:26:11

    Yes, it is a drag collecting sales tax from your customers. Welcome to the world of business. Having to collect this tax from our customers, while they can shop on Amazon “tax-free” (even though Amazon has nexus in our state by every definition included in the tax code) puts so-called bricks and mortar stores at an enormous, unfair competitive disadvantage. Amazon can activate software tomorrow that would correctly calculate the applicable sales tax in any locality- this is not a real difficulty. Why should a product bought at my store cost the customer 9.75% more than a product bought from an Amazon affiliate who resides down the street from me? If you can’t figure out how to run a competitive business on a level playing field, you probably shouldn’t be running a business.

    The real problem here is that the sales tax is a regressive tax that is resented by one and all, yet it is the funding source for all kinds of worthy and neccessary civic endeavors.

    I have owned my bookstore business for many years, and I can tell you that the sales tax disadvantage is real, and the effort to avoid collecting it has been a cornerstone of the growth of Amazon and other internet retailers. One bookstore chain in particular spent millions of dollars making the case that their internet business was completely separate and unrelated to their storefront business (even though they bore the same name, that customers can return books to their stores that they bought online, that there were kiosks in the stores where people could shop online on their internet site, etc etc) –all to avoid having to collect sales taxes. Clearly it was a huge loophole that they feared would seriously hurt their business if it closed. They quietly changed this policy partially in hopes of avoiding the huge penalties that would be levied on any of us who failed to collect sales tax when we were legally obligated to do so.

    Small and large Main Street business are already being put out of business by the internet retailers, and it isn’t because of paperwork.

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