Merchants Would Face Hefty Costs with Online Sales Tax Bill
By Kenneth Corbin
Opponents of online sales-tax legislation pending in Congress have released a study estimating that midsized Internet and catalog retailers could face staggering costs from having to implement new software to perform the tax calculations over a patchwork of state and local jurisdictions.
Even though the Marketplace Fairness Act (MFA) would require that states simplify their tax codes and provide merchants with free software before imposing the new collection obligations, retailers with annual sales in the range of $5 million to $10 million could incur initial expenses of between $80,000 and $290,000 associated with integrating the software, and recurring annual costs of $57,500 to $260,000 in the form of maintenance, updates and other issues.
"Software alone does not and cannot provide a solution that's simple and easy and free," Steve DelBianco, executive director of NetChoice, one of the groups behind the study, told reporters on a conference call.
The study was conducted by the True Simplification of Taxation coalition, or TruST, an organization comprised of the Direct Marketing Association, American Catalog Mailers Association and the Electronic Retailing Association, in addition to DelBianco's group, each of which opposes the MFA. Ecommerce giant eBay has also been lobbying against the bill, while rival Amazon is a supporter, as is the National Retail Federation.
The central premise of the TruST coalition's study is that the "free" software promised by the MFA is anything but. The group argues that the varying codes across the 46 states with a sales tax would require online sellers to retool their order management systems, shopping carts and other platforms item by item, a costly and time-consuming endeavor that would substantially chip away at, if not outright eliminate, merchants' profits in the small-margin ecommerce business. That states would have to provide the software for free is small solace when there are no provisions in the law addressing integration and maintenance costs.
"It's not free and it's not easy to maintain," said Larry Kavanagh, a co-author or the report and manager at the ecommerce platform Kalio, where he previously served as CEO. "The bottom line is the MFA will impose an unfair and potentially crippling burden on online and catalog retailers."
Some software vendors counter that their products have been moving steadily into the mainstream, are increasingly coming pre-installed in order management systems and winning greater adoption with payment processors. One of those is FedTax, the maker of TaxCloud and an ardent supporter of the MFA.
"We admit that not all order management systems have pre-integrated with TaxCloud (yet), but that tide is shifting rapidly," FedTax CEO David Campbell wrote in an email. "Our view is that sales tax compliance is approaching a "tipping-point" where it will become a standard feature - soon all order management systems will have sales tax management already on-board just to remain competitive."
The authors of the study argue against what they call "the myth of plug-and-play integration," contending that few retailers use out-of-the-box software to run their shops, but instead typically run legacy systems that have often been customized over the years, adding another layer of complexity to the process of integrating tax software.
"A "plug-in" integration only works when using unmodified, out-of-the-box software," the authors wrote. "In the real world, where software has been modified to fit the retailer's business, integration is substantially messy and expensive."
The study also warns of additional integration challenges that multichannel sellers could face, as well as the risks and potential costs that could arise from state audits.
The Senate passed the MFA in May, sending the measure to the House of Representatives, where it faces an uncertain path forward. Last week, House Judiciary Committee Chairman Bob Goodlatte (R-Va.) released a set of principles he said should guide lawmakers' work as they consider sales tax legislation. Among them were the notion that Congress should not set a precedent for new forms of interstate taxation and a call for technology neutrality - that businesses operating online or only out of a physical store should face the same tax compliance burden.
Those principles were left open to interpretation, as DelBianco of NetChoice claimed that the MFA fails on all seven counts, while the NRF issued a statement declaring Goodlatte's move an encouraging sign for supporters of the bill.
Under current law, online retailers generally are only required to collect sales taxes in states where they have a physical presence, such as an office, warehouse or call center. Shoppers in sales-tax states are supposed to report their untaxed Internet purchases on their annual income returns, but most people are either unaware of that requirement or ignore it.
About the author:
Kenneth Corbin is a freelance writer based in Washington, D.C. He has written on politics, technology and other subjects since 2007, most recently as the Washington correspondent for InternetNews.com, covering Congress, the White House, the FCC and other regulatory affairs. He can be found on LinkedIn here.
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