Should online retailers with less than $1 million in annual revenue be subject to a federal law mandating that consumers pay taxes on web purchases? How about $5 million?
Turns out, it might not matter much, according to a new study from two University of Tennessee researchers for the U.S. Small Business Administration. That’s because even the higher $5 million exemption would leave roughly 57% of online purchases in the United States subject to such a tax, and a $1 million exemption would make little difference in the dollar value of web purchases subject to sales tax.
The question arises because of a debate before the U.S. Congress about the Marketplace Fairness Act. It would allow states to mandate sales tax collection by online and catalog retailers whether or not they have a physical in-state presence such as stores or distribution centers—a legal concept known as nexus.
The U.S. Senate passed the Act in May. Its version exempts retailers with less than $1 million in remote sales—that is, sales to customers in states where they have no physical presence and no existing requirement to collect sales tax. The bill remains before the U.S. House where, in September, the House Judiciary Committee released “principles” for a potential federal online sales tax law.
The report released this week is entitled “An Analysis of Internet Sales Taxation and the Small Seller Exemption” and was written by Donald Bruce and William F. Fox, part of the university’s Center for Business and Economic Research, for the Small Business Administration’s Office of Advocacy.
The study deals with only $1 million and $5 million thresholds, and concludes that either one would likely bring in the same sales tax revenue from online purchases. That’s because most online retailers—as represented by those included in Internet Retailer’s Top 500 and Second 500 guides, which the report authors use as a basis for their research—account for “the majority of all American online business.”
The sales tax study estimates that there are 5 million online sellers in the United States, of which 1,817 sell more than $1 million a year. The 2011 Internet Retailer guides include 974 merchants with online sales exceeding $1 million per year, but the study authors assume there are several hundred smaller e-retailers not counted in these guides.
The study’s authors conclude that 57.3% of U.S. online retail sales would be covered by sales tax, if Congress were to adopt the proposed legislation with an exemption for retailers that sell less than $1 million a year online.
Here is how they come up with that 57.3% figure: They start with the 974 retailers in the Internet Retailer Top 1000 that booked more than $1 million in online sales in 2011. After stripping out European sales of some of the larger retailers in this group, they conclude that the 974 merchant’s American sales totaled $138.7 billion. They then estimate that U.S. online retail sales in 2011 totaled $242.1 billion—taking the Commerce Department’s estimate of $193.9 billion in e-retail sales in 2011 and adding 20% to account for academic research that suggests the Commerce Department figures understate actual online retail sales. Thus, they conclude, 57.3% of online sales would be covered by sales tax.
They further conclude that raising the exemption to $5 million would have little impact on the dollar value of sales covered by the sales tax law, and hence the added revenue that states and localities would take in. They estimate the 750 Top 1000 retailers that generated 2011 online sales of more than $5 million accounted for $138.0 billion in American web sales, or 57.0% of the total. Reducing the exemption to $500,000 would only double the number of retailers affected, and those required to collect sales tax would still represent only 0.07% of all U.S. merchants selling online.
The report’s authors also note that states and local government already are collecting sales tax on many online sales. Many of the larger online retailers already collect sales tax in some states, with the average number of states among 223 firms studied being 18, the report says. “Thus, the Marketplace Fairness Act with its $1 million SSE [small-seller exemption] would likely eliminate less than one-half of the losses associated with inability to collect tax on remote sales,” the report states.
The study also addresses criticisms by opponents of the sales tax bill that collecting sales tax from some 10,000 taxing jurisdictions—including localities as well as the 45 states with sales tax laws—would put an undue burden on smaller online retailers. The report notes that the legislation requires states to provide free sales tax compliance to web retailers and that there are vendors that specialize in helping retailers collect and remit taxes to all the taxing jurisdictions. The report downplays the impact of the law on retailers, saying, “evidence suggests that compliance costs are about 3 percent of taxes collected on average, and third-party companies are available to provide sales tax compliance software and assistance.”
The study drew fire from eBay Inc., which has taken the lead among e-commerce operators that want a higher revenue threshold for retailers. The online marketplace operator has proposed a $10 million threshold, saying that would save smaller web merchants the cost of collecting sales taxes for e-retail purchases and then remitting those taxes to states.
“Rather than engaging in thoughtful, new research with fresh data, the report rehashes outdated studies that underestimate small business Internet commerce and fails to address the compliance and enforcement issues, including out-of-state audits and investigations, that continue to raise deep concerns with the Marketplace Fairness Act,” says Brian Bieron, eBay’s executive director of global public policy.
The National Retail Federation, a trade group led by store-based retailers that favors an online sales tax, had a more positive reaction.
“This objective, non-partisan and peer-reviewed academic analysis and report from the Small Business Administration confirms what local retailers have been saying for decades: the lack of a level playing field between brick-and-mortar stores and their online and remote competitors is blatantly uneven and unfair, and continues to place them at a competitive disadvantage,” senior vice president David French said in a statement.
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