Do Online Retailers Have Edge Over Traditional Stores?
By Bob Bahr
Associate Editor
Web Posted: February 16, 1999.
Washington, D.C.-Congress may have given an advantage to retailers selling jewelry over the Internet when it issued a moratorium on new Internet taxation until Oct. 21, 2001.
The law disallows any new state or local sales taxes on interstate Internet commerce or on Internet access services. Existing state sales tax laws stand.
The result is that an online retailer may sell jewelry at the same price as a Main Street retail jeweler and yet offer a better value to the consumer because of a lack of sales tax. Technically, the consumer is still responsible for paying sales tax on Internet purchases; they should remit the sales tax at their current state's rate along with their income tax forms. Very few currently do.
Under the law, consumers who purchase jewelry from an Internet retailer based in their own state will pay state sales taxes on the purchase, and the same holds true for purchases from a national chain with a branch in the consumer's state. For example, online retailer Valueamerica.com is only responsible for collecting sales tax from consumers who live in Virginia, where the company is headquartered. This theory is based upon the assumption that if a retailer is operating in the consumer's state, it will know the sales tax rates and laws of that state. If a consumer purchases merchandise from an online retailer based in another state, no sales tax is charged.
The crux of the argument against Internet sales taxes is that they create an unfair burden upon the retailer to collect them.
Although Jewelers of America hasn't taken an official stance on the issue, Deputy Executive Director David Rocha said knowing the sales tax rates of every state and city would be too large a burden for most online retail jewelers.
"The majority of our members are small independent retailers, and they don't have a lot of people in the store," Rocha told National Jeweler. "This would create a lot of work for the few people who are there."
That's identical to what catalog retailers claimed in a case that went to the Supreme Court. In that 1992 case, the court reaffirmed a 1967 ruling that complying with the thousands of state and local taxes would be impossible and unfair for mail-order companies.
Who Loses?
Who are the losers in this game? Traditional retail jewelers that must compete with Internet retailers may lose some business, although Rocha, for one, isn't worried about this.
"I don't think the day will ever come when someone will buy a $10,000 piece of jewelry without seeing, feeling, touching it, unless they can compare the exact same product to another and are then shopping for value over the Internet," Rocha said.
In other words, branded pieces could become fair game for cost-conscious consumers searching the Internet, but custom pieces will remain safe-at least until e-commerce becomes as familiar to consumers as traditional retail purchasing.
The other loser because of the Internet sales tax moratorium may be state treasuries. Several states rely on sales taxes to fill their coffers, and if e-commerce continues to grow as it did in 1998, doubling from the previous year to $6 billion in sales according to some estimates, states could take a serious fiscal hit.
And yet two governors are clamoring to make their states completely free of Internet sales taxes. Massachusetts Gov. Paul Cellucci eliminated a 5% Internet sales tax last year, hoping to attract Internet businesses to his commonwealth. In California, where sales taxes are heavily relied upon for fiscal solvency, Gov. Pete Wilson called for a permanent ban on local and state Internet sales taxes. The idea is that freer commerce will mean the creation of more jobs, which is more valuable than tax revenue.
At the district level, politicians are cautious. Brian Cresta, a representative for the 22nd Middlesex District in Massachusetts, said he understood Gov. Cellucci's no-tax stance, but he is concerned about the financial impact of a tax-free Internet.
"I'm kind of on the fence on this issue," Cresta told National Jeweler. "I don't want to see this become a loss leader for the commonwealth. I don't think malls are going to be extinct in 15 years, but I think people are going to be doing the vast majority of their shopping online. I know myself I did a significant amount of my Christmas shopping online, just for the ease."
Meanwhile, national legislators may object to an Internet tax on principle. It certainly was a popular moratorium-the Senate voted for it by a margin of 96-4. Among lawmakers there is a reluctance to in any way restrain this new medium.
Trade groups worry Congress may get carried away and institute a national-or even global-sales tax for Internet purchases, on top of state and local sales taxes.
"We are monitoring this issue very closely," said JA's Rocha. "Any type of national sales tax has the potential to hurt sales, particularly if jewelry is singled out as luxury goods, so there's a different tax bracket for it."
The law is a moratorium, not a ban. In fact, the law specifies that a 19-member, temporary commission composed of industry and government leaders form to study the issues of taxation and e-commerce. The commission is required to report to Congress after 18 months with proposals on how best to tax Internet sales.
The National Retail Federation is not waiting to see what will emerge from this commission, even though it will not take an official stance on the issue due to its divided constituency. Some members are catalog retailers that perceive e-commerce as a threat to their industry.
"Representatives from state governments and from businesses have been meeting for the last two years, meeting every two months, on this issue," said Sarah Whitaker, director of government relations for the National Retail Federation. "We want to work something out that we can agree to, so we can present it to the full commission."
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