May 4 2008

The Shop Local Fallacy

By Jane • Letters of Opinion • • Tags: , ,

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.

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