There is a currently a big push in this country to pass into law the “Main Street Fairness Act”. The purpose of this act according to it’s supporters is to force online retailers to charge sales tax for all purchases, not just for sales made in the state where the online retailer has a physical presence. The claim is that online retailers have an unfair advantage over traditional brick and mortar stores by not charging sales tax.
Though these laws apply to all online retailers, Amazon has clearly been the target because of it’s huge market share. Several states have already passed laws requiring online retailers to charge sales tax if a sale originated from an affiliate for the retailer in that state. States like Colorado, Arkansas, Illinois, and Connecticut have already passed the so called Main Street Fairness laws and Amazon’s response has been to cut ties with affiliates in those states.
Who is Actually Behind the Main Street Fairness Act?
Now that I’ve set the background for what this law intends to do, let’s take a look at some of the misinformation surrounding it. First of all the name itself, like so many things in government, is kind of a misnomer. Politicians and special interest groups are fond of using the term “Main Street” to suggest small business and as a separate thing from the big businesses on “Wall Street.” This couldn’t be further from the truth with the Main Street Fairness Act. Currently Wal-Mart, Target. Best Buy, Home Depot, and Sears are all spending millions of dollars to lobby politicians to pass this bill into law.
That doesn’t sound much like “Main Street” to me. The name of this coalition and the scare tactic advertisements that they’ve been running show a clear intention to deceive the public about who actually holds an interest in this bill being past.
Do Taxes Hurt Local Businesses?
This is one of the more humorous if unintended aspects of this law. Some of the same politicians who are pushing this are the same ones that want high business taxes. Yet by the very existence of the Main Street Fairness Act it’s pretty much an admission that taxes hurt businesses.
The idea that online retailers have an advantage over brick and mortar stores because they don’t charge taxes is a bit misleading. Thinking about all the online purchases I’ve ever made I’m not sure that there was ever a time when not having to pay taxes influenced my buying decision. The truth is that for many product categories online retailers charge significantly less then local ones. There are of course exceptions to this but for many items, it’s just stupid to buy it locally. If you want an example just go look at how much a USB flash drive or digital camera memory costs at an local retailer compared to online retailers. You will likely pay double the price if you buy it locally.
The other factor in purchasing online is selection. Local retailers are limited buy how much square footage is in their store. Online retailers though, especially Amazon have very large warehouses which can hold more than 10 times as many different products as a local retailer can hope to provide it’s customers.
The issue with online retailers performing so well, has little or nothing to do with whether or not it’s customers pay taxes, contrary to what the special interests and politicians would have you believe. It’s convenience, price and selection.
The Problem With Individual States Passing Laws
There is an inherent problem with individual states passing anti-online business laws. For one, shoppers don’t know where the affiliate is located when they click on a link to go to Amazon or another retailer and so the amount of tax they will get charged could vary a great deal and the shopper won’t know this information until they go to checkout. For example if Tennessee passed a law like this, I’d be pretty ticked off to find myself getting charged 7% sales tax when if I had any prior-knowledge I would have just avoided clicking on an affiliate link at all.
The second problem is that there is potential for double taxation. Let’s just use Amazon as an example again, since they are clearly the target of these laws. Amazon is based in Washington state. So if an online shopper who lives in Washington purchases something from Amazon, they would be charged 6.5% sales tax. But what if that shopper clicked on an Amazon affiliate link from a person that happened to live in Colorado. According to Colorado’s anti-online business law they want to be paid sales tax as well.
There’s also another potential for double taxation. Many states have what is called a Use Tax. This means that citizens are supposed to report online purchases and pay sales tax. So if a person living in Pennsylvania buys something online through an affiliate in Colorado, then they could potentially end up paying sales tax twice.
These kind of issues are a lot of why Amazon has simply been cutting ties with affiliates in those states. I should also note that Amazon has been pushing for the federal government to make one unified sales tax law that would eliminate these kind of issues. The federal government though doesn’t have a whole lot of interest in pursuing it because ultimately it’s money that they won’t see either way.
And one more little twist on this concept is that many states allow individual cities and counties to charge their own sales tax on top of the state sales tax. So what happens when local politicians decide that they want a piece of the pie too?
The Truth About The Money
The states that have been pushing this Main Street Fairness thing most heavily are those with big budget shortfalls. So instead of trying to balance their budgets with cuts, they are seeking new sources of revenue. When Colorado passed their version of the anti-Amazon bill, Amazon severed ties with 4,000 affiliates in that state. Something that they said they would do if Colorado passed the bill.
Recently I’ve been hearing scare tactic radio advertisements from the Main Street Fairness Act people here in Pennsylvania. And that’s really what got me thinking about all of this. So let’s use Pennsylvania as an example now.
Pennsylvania has a 6% sales tax and some of the politicians would like to see Amazon give them that money. Here’s the thing though: Amazon affiliates make anywhere from 4-7.5% commission on sales that they generate with 6% more of a typical average. So 6% of Amazon’s sales made through affiliates is already coming into the state. The problem that state governments have though is that the money isn’t going directly to them.
Those sales commissions are going to individual citizens and small internet businesses. You know, the REAL main street people. The Main Street Fairness Act has nothing to do with protecting Main Street. In fact it hurts Main Street. When Amazon cut off 4,000 affiliates in Colorado that money stopped coming into the hands of private citizens and the state government didn’t see any of that money either because the sales stopped happening through those in-state affiliates. Everybody lost.
Amazon also operates many warehouses around the country. Four in Pennsylvania alone. I don’t have access to how many employees that adds up to but I would venture a guess that it’s at least a couple thousand with much higher than that around Christmas time. Obviously providing several thousand jobs in a state is huge and state politicians would be stupid to ignore that. I don’t know how much income these employees collectively make but I do know that there would be a decent amount of state income tax generated from all those people working. Not to mention the money they make gets spent in grocery stores and things like that that generate more sales tax revenue for the state.
So it’s pretty clear that Amazon brings a lot of money into the state, it’s just not getting into the hands of the government as efficiently as they would like it to.
Amazon avoids warehouses being considered a physical presence in the state by setting these warehouses up as separate companies. This is probably the only area where someone could maybe fault Amazon in this whole process.
So What Should States Do?
Maybe a better question would be, what could have they done 10-15 years ago? The fact is that many states lack any really significant player in the online retail world being based in their state. Consequently their constituents are spending money that benefits businesses somewhere else in the country. This is the real thorn in the side of politicians that have gotten behind the Main Street Fairness Act.
Their states are not setup for success in the ever growing online business world and money is leaving their state with no real plan of what to do about it. So instead of trying to foster online business development within the state, politicians are trying to squeeze money out of online retailers based in other states. Most notably Texas tried this. They handed Amazon a bill for $329 million in sales taxes. Amazon responded by closing its distribution center in Texas. Government regulation killed jobs once again.
Most states didn’t recognize what the future held for the internet a decade ago and so did nothing to try and bring businesses into the state. There is still hope though. The internet is still relatively young and there is room for all kinds of competition between online retailers. Instead of punishing businesses out of state and individual affiliates in the state, a better approach would be to make the tax laws as easy to deal with as possible so businesses want to operate within Pennsylvania or whatever state is considering going down this road.
What Can Be Done?
For now state governments should be content with the 6% commission that Amazon affiliates bring in and with the thousands of jobs provided at Amazon warehouses. While at the same time, they should push the federal government to create one standard law for all online retailers and states to follow.