Internet Giants Amazon and eBay in a Tax War
A graph presented by eBay intended to show that it is large retailers, not sales taxes, that hurt.
Two internet behemoths, and two of the largest booksellers in the world, went at it in testimony before the House Judiciary Committee recently. The subject was the collection of out of state sales tax by internet retailers. And here is the surprising thing – each was focused not on their own business interests, but on those of you, the small bookseller or other merchant. You may have found them at times heavy handed and too quick to raise their fees, but on this issue, they are both fighting for you. Oddly, though, they reach totally different conclusions as to what is in your best interests. Those conclusions are as different as are their own personal interests. It's funny how things happen that way.
The issue is whether an online business must collect sales tax on items sold to out of state customers. Right now, the U.S. Constitution, as interpreted by the Supreme Court, says that a state can only require an out of state retailer to collect sales tax from customers within their state if that retailer has some connection to that state, like a store or warehouse located within its boundaries. However, that court has implied that if the federal government passed a law allowing states to demand out of state retailers collect a state's sales tax, regardless of whether they had any presence, then they could be forced to to do so. Naturally, most states would love to have the federal government pass such a law, as they could collect a lot more sales tax money that way. Many consumers probably disagree.
However, we will leave aside the interests of government and consumers, and instead, as Amazon and eBay did in their testimony, focus on the interests of booksellers and other retailers, big and small. Amazon came out strongly for a federal law requiring internet retailers to collect state sales taxes, counterintuitive to their long stonewalling of sales tax collection. Ebay came out just as strongly opposed.
Amazon's position is the more surprising. In his testimony, Amazon's Vice-President for Global Public Policy, Paul Misener, stated that the internet retailer has long supported such federal rules, and that may be the case. However, as states in the past have tried to get Amazon to collect their sales tax, no company has been more adamant in its refusal. The company has closed warehouses in Texas, let go “agents” in other states when those states asserted those were sufficient connections to force Amazon to collect their sales tax. In Tennessee, it demanded the state promise not to find a connection before it agreed to open warehouses and hire workers in that state. In California, up until a few weeks ago, Amazon threatened to put an initiative on the ballot to prevent state officials from requiring sales tax collections on out of state retailers on the basis of such connections. No one has played hardball like Amazon on this issue, so why are they now asking Congress to pass a law that would require them to collect sales tax?
Before attempting to answer this question, let's look at what Amazon said. Mr. Misener stated that passing such legislation would serve the purposes of “protecting states’ rights, addressing the states’ needs, and leveling the playing field for all sellers.” On that last concern, Mr. Misener repeated the argument that so-called “Main Street” retailers have been arguing for years – that they are at a disadvantage to online sellers because they must charge their customers sales tax while the online retailers do not. Tax-free prices are cheaper than taxed ones, hence a competitive advantage. “Fairness among sellers should be created and maintained. Sellers should compete on a level playing field,” Mr. Misener asserted. Then he added, “Congress should not exempt too many sellers from collection, for these sellers will obtain a lasting un-level playing field versus Main Street and other retailers.”
So, going back to the question why Amazon is doing this, many “Main Street” shops might be dubious of their motives. Main Street booksellers have long complained that Amazon was the epitome of the unlevel playing field, using their size and lack of overhead by not having a physical presence on Main Street to undercut and eventually drive them out of business. There has long been the refrain that Amazon, in effect, uses their stores as a showroom. Customers come in to look at the merchandise on Main Street, make their selection, and then go home and order the merchandise for less from Amazon.
Well, not to be suspicious, but behind Amazon's words, they may now see their self-interest coinciding with that of “Main Street” retailers. Amazon has opened up distribution centers in several states to reduce their costs, and they wish to open them in more. They have what may (or may not) be considered “agents” willing to support their site in every state. Meanwhile, the states are pursuing them more aggressively than ever before. Just a few weeks back, Amazon threw in the towel in its dispute with California and agreed to begin collecting California sales tax next September. California has Amazon's largest customer base, and they want to be able to open warehouses close to their customers. The changing situation is forcing Amazon to collect sales taxes in more and more locations, in effect putting them at a competitive disadvantage to smaller internet retailers with a location in just one state. They are starting to feel the pain “Main Street” merchants have felt for years.
Internet Giants Amazon and eBay in a Tax War
Selection and price may make Amazon more competitive than sales tax status.
For eBay, this is an entirely different situation. They too argued on behalf of “Main Street,” but their Main Street is not so much an issue of location as of size. Ebay's argument is that Main Street is not being decimated by tax-free online retailers. It is being annihilated by large retailers, wherever they are. Everyone knows what Wal-Mart did to Main Street, and if you don't, eBay is filled with statistics. “The threat to small independent retailers,” stated eBay Vice President for Government Relations Tod Cohen before the Committee, “is coming from giant multi-billion dollar competitors online and offline, which has been the case for nearly half a century.” His contention is that the advantages of having a local presence balance any advantages of not charging sales tax. It is the cost savings of being large in size that is killing small retailers. Besides which, many Mom and Pop local retailers also sell on the internet now, so a sales tax break helps them too. He notes that “Main Street” has been in decline since long before the invention of the internet, the victim of large retailers. “Sameness is not fairness,” he says, arguing that small online retailers deserve a break vis a vis the retail giants. Oh, did we mention, Amazon is a retail giant?
Now, we can understand eBay's sympathy with the small, online retailer. Ebay is, in effect, a consortium of small internet retailers. They do well, eBay does well. Of course, eBay itself is not small, and those “Mom and Pop,” “Main Street” retailers may not like eBay any more than Amazon. By combining offers of thousands of small retailers on one site, they have effectively created one large, at times cutthroat retailer to compete against them. Their tears, like Amazon's, may be crocodilian.
Perhaps the differences in approach can best be seen in the ludicrously large gap in what each proposes for a “small retail exception.” The proposed legislation to require out of state retailers to collect sales tax has an exception for small retailers. If Grandma is selling her potholders and handmade raspberry jam online, no one wants her to have to figure out what each state, and each municipality within each state, charges, and is the rate the same for jam as it is for potholders. And then, she would have to send her 40 cents to Idaho, 35 cents to North Dakota, and so on for the other 43 states with sales taxes. The question then is what is the amount at which a retailer becomes large?
For Amazon, which would of course be a large retailer, it wants a low threshold so as to reduce the number of competitors who could sell tax free. Amazon claims that nearly 30% of uncollected sales taxes comes from retailers doing less than $150,000 in annual sales. “A $150,000 exception would deny the states nearly 30% of the newly-available revenue,” they state, the implication being that the small retailer exception should ideally be less than $150,000.
Ebay, with its share of not-so-small small retailers, has a different point of view. They pointed out to Congress that it has let the Small Business Administration determine what constitutes a “small business.” The SBA, says eBay, has set $30 million as small for “electronic shopping,” and $7 million as the smallest of anything, pertaining to newsstands and kiosks. So, for Amazon, the ideal small business exception is less than $150,000, while for eBay it is $30 million. That's a difference of almost... $30 million!
Will Congress pass this legislation? I don't know. It has come up before. In addition to expected pressure from “Main Street” to pass it, there is a much stronger push this year from the states, desperate for additional revenue. Meanwhile, congressmen are generally loathe to be seen as raising taxes, and fair or not, many constituents enjoy this money-saving loophole to avoid sales tax. Neither Amazon nor eBay's motives are as pure and selfless as they might have Congress believe, but that does not mean they are wrong. Doing the right thing, even with self-interested motives, is still doing the right thing. The question is... what is the right thing to do?