Online-sales tax-collection push on

TAXING WORK: Jeff Dronzek, owner of Learn All About It Toys, shows off one his store’s products, the PlasmaCar, to his daughter, Danielle. The Warwick store owner says that online retailers’ ability to avoid sales taxes is an “unfair advantage.” / PBN PHOTO/NATALJA KENT
TAXING WORK: Jeff Dronzek, owner of Learn All About It Toys, shows off one his store’s products, the PlasmaCar, to his daughter, Danielle. The Warwick store owner says that online retailers’ ability to avoid sales taxes is an “unfair advantage.” / PBN PHOTO/NATALJA KENT

Jeff Dronzek, owner of Learn All About It Toys in Warwick, doesn’t mind competing with online retailers, but he does get frustrated with “show-rooming,” when customers browse items in his store, get advice from the salespeople, then order them from an Internet retailer.
What makes it worse, Dronzek said, is when the customer is ordering online to avoid state sales tax, which most Internet stores don’t collect.
“It is an unfair advantage for the online retail world,” Dronzek said about the current sales tax practices. “It is something that is supposed to get paid, but no one realizes it.”
So Dronzek has joined with the vast majority of brick-and-mortar retailers and, more surprisingly, a growing number of Internet merchants, supporting a bill in Congress to require sales tax collections of online purchases.
After many years of failed efforts to achieve sales tax equity between online and brick-and-mortar stores, the bill filed last month has support on both sides of the aisle and with a large coalition of retailers, including Internet giant Amazon.com.
Co-sponsored by 53 members of Congress and three-quarters of the Rhode Island delegation, the bill would give states the authority to make retailers collect sales tax on remote transactions, even if the seller has no physical presence in the state.
“This legislation will help ensure that large, Web-based retailers play by the same rules as small businesses in Rhode Island and around the country,” said Sen. Sheldon Whitehouse, D-R.I., a co-sponsor. “Small businesses are the backbone of our economy, and they deserve to compete on an even playing field.”
Compared to its neighbors, Rhode Island has little leverage with online retailers that would convince them to pay state sales tax on items they sell to residents and businesses here. Sales to the nation’s smallest state are never going to put a big dent in a national or international ledger and few online giants need physical facilities within Ocean State borders to conduct their business (having a physical presence, or “nexus,” in a state requires the retailer to collect sales tax for items sold to residents of that state). So the agreements Amazon recently made with Massachusetts and Connecticut to pay sales tax there in connection with opening offices are long shots for the Ocean State.
In Rhode Island, the most recent estimate suggests that in 2012, remote sales to the state, including mail-order catalogue purchase as well as those made through the Internet, would have generated $70.4 million in state revenue if they had been subject to the sales tax.
However, if the federal bill proposed this month, named the Marketplace Fairness Act, is approved, that total will not be winding up in state coffers.
In grappling with the sales tax and Internet merchants, state lawmakers approved a provision that would cut the state’s 7 percent sales tax rate – for all transactions subject to it – by a half percentage point if a national online-sales-tax law is approved.
In addition, it’s unclear whether the sales tax change last year that placed a $250 limit on the exemption for clothing purchases will be allowed under the streamlined taxation guidelines in the bill.
Paul Dion, chief of the R.I. Office of Revenue Analysis, said that preliminary calculations show state revenue should come out nearly even from a cut in the sales tax rate offset by the additional online tax revenue.
There are also other variables involved, including the size of an exemption for small, online merchants in the Marketplace Fairness Act.
The previous version of the bill exempted any business with less than $500,000 in online sales, but the version unveiled this month doubled that exemption to $1 million in sales.
Rep. David Cicilline, D-R.I., the only member of the Rhode Island delegation who hasn’t signed on to the current version of the bill, co-sponsored a House version in previous years.
Cicilline spokesman Richard Luchette said the congressman was still reviewing the current version of the bill and had not decided whether to support it or something else. He declined to say whether the size of the exemption was a sticking point.
The legal sales tax landscape for American retailers was established by a U.S. Supreme Court ruling in 1992 that set forth the need of a physical presence in a state before the retailer needed to collect sales tax. Short of a state nexus, for all out-of-state, online purchases, the buyer is obligated to keep track of and pay sales tax with their end-of-the-year tax return, although very few do and states make little effort to enforce it.
The physical-presence rule is part of Amazon’s decision to start collecting sales tax for purchases made in Connecticut and Massachusetts by Nov. 1.
Amazon plans to open a $50 million distribution center in Connecticut and in Massachusetts the merchandising giant plans to expand an existing presence that already includes offices in Cambridge.
Amazon has been expanding its capacity to offer rapid delivery of online orders, but Rhode Island’s small size means the company won’t necessarily need to open a distribution site here to serve the state.
Along with helping brick-and-mortar merchants, passage of the federal bill would almost surely reverse the damage local affiliates of national online retailers have sustained since Rhode Island first tried to apply pressure to Internet merchants.
Responding to similar moves in other states, Rhode Island lawmakers in 2009 passed a “click-through-nexus” law subjecting purchases made through in-state affiliates of out-of-state Internet retailers to the tax.
Amazon responded by dumping all of its Rhode Island affiliates, a move it has stuck to in the three years since.
The affiliate law turned out to be more a symbolic gesture than a practical policy as the state has not collected a dollar in sales tax from online-affiliate sales since the law was enacted.
While Amazon may have been viewed as a villain in the sales tax debate years ago, the company is now an ally of states such as Rhode Island pushing for a federal online sales tax collection law.
With Amazon joining Walmart, retail trade groups (including the Rhode Island Retail Federation) and nearly every large brick-and-mortar retailer in support of the Marketplace Fairness Act, Ebay and Overstock.com have become the biggest opponents. Despite growing support for a federal solution to the online sales tax question, complexities remain that could still trip up the effort.
The Marketplace Fairness bill requires states to adopt the Streamlined Sales Tax and Use Agreement, which Rhode Island is one of 22 states to have signed already, or comply with a set of simplification rules designed to ease the confusion of state-by-state rules.
But Soren Ryherd, co-founder of Providence online-marketing firm Working Planet Marketing Group Inc., said the federal law could still cause confusion online and raised questions about how internationally based Internet companies would be treated.
“I do think that any solution that opens the doors to make widely varying tax structures could cause problems,” Ryherd said. “If there is a right to opt in or out, some states are going to institute it to drive revenue and others will not do it to recruit companies.”
Ryherd won a grant from The Rhode Island Foundation last year to establish The Retail Project, an attempt to launch successful online brands that will eventually open brick-and-mortar Rhode Island storefronts, putting him on both sides of the digital divide.
“There is an argument to be made about whether local governments are entitled to a transaction fee [for Web purchases,] Ryherd said. “I don’t have issues with something done at the federal level, but at the sub-federal level, there is a question of whether this would open the door to do something that would not be equitable.”
At Learn All About it Toys, Dronzek said there’s no way to quantify how much business he loses to online retail, let alone how much of that is the result of sales tax. His 5-year-old business has never existed in a world without the Internet, or Amazon.
But the benefits of ending the tax advantage online retailers have help states as well as local stores, he said.
“By losing out on those taxes, it affects the general public, schools and infrastructure,” Dronzek said. “And local stores are the ones helping communities around us and help the state, supporting local sports teams and schools.” •

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