SALT LAKE CITY — Traditional retailers are battling for real-world dollars against their virtual reality competitors.
So far the Internet has an advantage, but if some lawmakers in Washington, D.C., have their way, consumers would start paying sales tax on purchases made over the Internet no matter where they live, impacting Utah companies such as Overstock.com, 1-800 Contacts, Backcountry.com and Ancestry.com.
Betsy Burton, who owns Salt Lake City’s The King’s English Bookshop, couldn’t be happier.
Burton and others who manage traditional “brick-and-mortar” physical stores claim Internet sellers get an unfair advantage by selling their goods without collecting sales tax.
“If an Internet company doesn’t have to collect sales tax, then essentially, in Utah, we’re operating at a 10 percent disadvantage,” Burton said. “It isn’t just the sales tax, it’s also the money we pay our accountant and other (associated collection expenses).”
Each year, U.S. states generate sales tax revenue, money that funds public services, including roads and emergency responders. As more commerce moves online, state and federal government see web-based sales as an easy way to bring in more cash. This year, U.S. Sen. Dick Durbin (D-Ill.) and Rep. John Conyers (D-Mich.) introduced the Main Street Fairness Act, which would force states to collect taxes from online retailers. A Senate version of the bill is in the Senate Finance Committee. A House version has been referred to the Judiciary Committee. A timeline won’t be announced until after Congress returns from recess on Sept. 6. If a bill passes, that could mean losses for several Utah-headquartered companies.
Losses from not collecting state and local sales taxes from Internet purchases will expand from $8.6 billion in 2010 to $11.4 billion in 2012, according to a University of Tennessee study. For Utah, that would mean about $110 million in annual lost revenue. Last year, the state received $467,000 from 8,200 taxpayers who voluntarily reported sales tax they owed.
Overstock and Backcountry declined to comment on potential losses, but each said they would comply with the measure if it became law. Ancestry also declined to comment.
Any online retailer has to be flexible enough to “think on its feet” and adapt to the ever-changing e-commerce environment, said Marit Fischer, communications manager for Backcountry. If the tax passes, Backcountry will make whatever adjustments are necessary to remain competitive. The company is not forecasting any staffing cuts if the law changes, she added. At Backcounty, about 600 of its 700 employees work in Utah.
Level playing field
“The brick and mortar guy just wants to be treated the same,” said Scott Hymas, chief executive officer of R.C. Willey Home Furnishings. “We don’t mind competing against the Amazons or anybody, but it makes it very difficult when they don’t have to collect sales tax.”
The proposed legislation would “level the playing field” with Internet-based retailers, making physical stores more competitive, Hymas said. “Tax the Internet guys, and then we’d all be treated fairly,” he said.
Without a tax, small businesses get hurt because they can’t compete on price, said Danny Diaz, spokesman for the Virginia-based Alliance for Main Street Fairness. If the Main Street Fairness Act passes, traditional stores could see some relief, he said.
Based on a 1992 U.S. Supreme Court ruling, online retailers are not required to collect sales taxes on purchases made in states where they do not have a physical presence. That leads Overstock to charge customers living in Utah sales tax but not customers in Washington, D.C., for example.
Nobody over time can operate at such a disadvantage, said Burton, the bookstore owner. “In the end, it will put all brick-and-mortars out of business and destroy our local economy in the process.”
Supporters of the Supreme Court ruling, however, say the system has allowed companies like Overstock and Amazon to grow into successful businesses.
In 1999, Overstock had 18 employees and did about $1 million in sales, said Overstock President Jonathan Johnson. In 2010, the company had 1,500 employees and did over $1 billion in sales.
“If we had, in 1999, to collect sales tax in every state, which would have meant (thousands of) taxing jurisdictions, that would have been a significant barrier to entry and probably prohibitive for Overstock growing in 10 years to become a major employer and paycheck provider,” Johnson said.
The issue of collecting sales tax should be left to individual states rather than Congress, Johnson said. He also said that among the major supporters of the Main Street Fairness Act are big-box retailers like Wal-Mart Stores Inc. who are “trying to squelch competition” from small Internet startups, which could grow to be major players like Overstock.
Some states like California, New York and Arkansas have passed legislation requiring Overstock and other online-only retailers to collect sales taxes on purchases even if they are out-of-state, provided they meet some threshold for doing business in the state — either a certain dollar amount or through in-state affiliates. In response, Overstock — along with Amazon — decided to cut ties with the affiliates — companies that operate retailing websites that market products offered through major retailers like Overstock or Amazon and even considered legal action against some of those states, Johnson said.
Currently, 45 states levy sales taxes and require any retailer with a physical presence to add the amounts on qualifying in-state transactions.
While online retailers argue that collecting sales taxes on all transactions would cost millions of dollars to implement, stifling future growth, states such as Utah are working to make it simpler for online merchants to gather the sales tax in an effort to collect the much needed otherwise lost revenue. State Sen. Curt Bramble, R-Provo, said Utah is among a large group of states involved in the proposed adoption of the Streamlined Sales and Use Tax Agreement that was created in 1999 by the National Governor’s Association and the National Conference of State Legislatures to make collecting sales tax easier.
The measure would work in conjunction with the Main Street Fairness Act to improve collection of sales tax through e-commerce, by simplifying and modernizing the collection process.
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