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Tuesday, November 27, 2012

Time to Start Collecting Sales Tax on Out-of-State Sales

Posted by on Tue, Nov 27, 2012 at 6:55 AM

Yesterday, Governor Chris Gregoire issued a press release urging Congress to pass the Marketplace Fairness Act, which would permit states to collect sales tax from out-of-state sellers.

It's an idea that makes sense, of course, and God knows the state could use the extra money. The Washington State Department of Revenue estimates that passage of the act could generate an additional $558 million in tax revenue for the 2013-2015 biennium, $934 million by 2015-2017. And it sure is hard to find a compelling argument for continuing to give out-of-state sellers a competitive advantage over local retailers.

But... as a former small business owner who once relied on out-of-state sales to pay my rent, prior proposals to close this tax "loophole" had always given me the willies.

In the 90s, my ex and I had a little software company, mostly selling a few titles we developed ourselves. By far the bulk of our sales went through the retail channel—about 70 percent moved through the major mail-order catalogs, which required us to buy expensive co-op advertising for the privilege of being stocked. We didn't always sell through our co-op, but when we did it could be months before we got paid. If ever.

But the direct sales, well that was almost pure margin, and the credit card transactions were promptly deposited into our checking account. And while these direct sales rarely amounted to more than a few thousand dollars a month, they consistently generated the cash flow we needed to make ends meet. We sold into all 50 states, though sometimes only a few units per state a year, but had we been forced to file quarterly returns in every state in which we did business, well, it simply would've been impossible. Imagine filing taxes 200 times a year. We didn't earn enough money to hire an accountant, and there weren't enough hours in the day to do the paperwork ourselves.

Whenever I tried to explain this to legislators, my concerns were shrugged off by Republicans and Democrats alike. I never felt that most elected officials understood the needs of a truly small business, if they even cared.

And so I was relieved to read that the proposed legislation exempts sellers who sold less than $500,000 in total out-of-state sales during the preceding year.

I'm not sure the bill is perfect. I would've preferred the federal government serve as a single collector to simplify filing, much in the same way that the state collects sales tax for local taxing districts. And that $500,000 exemption may in fact be too low a threshold. But from the looks of it, this is legislation that a small business like mine could've lived with.

So yeah, with online commerce representing an ever larger portion of our economy, it's past time to start requiring large out-of-state retailers to collect state sales tax.


Comments (19) RSS

Oldest First Unregistered On Registered On Add a comment

Burdensome regulations driving small businesses out of business?

We call BullShit.

Government is your friend, Goldy.

Posted by NIMBY.... on November 27, 2012 at 7:16 AM · Report this
You are right, Goldy. This is one reason that small business owners gripe a lot. The sheer minutiae of paperwork that has to get filed can drown a tiny company. Working for an accountant opened my eyes to this. In some states, if you do business there, even if you do not collect tax, you have to file a quarterly return with zeroes on it or you get slapped with a big penalty. You are right, so imagine having to remember to file all those quarterly returns or paying an accountant $50-300 per return. Yeah, I know there are a lot of small business that take advantage of their status (I hear that complaint a lot) but genuine small business need every advantage. I hope they do exclude businesses under 500,000.
Posted by Bugnroolet on November 27, 2012 at 7:33 AM · Report this
Step 1: complain about how regressive sales taxes are.
Step 2: promote more sales taxes.
Posted by doceb on November 27, 2012 at 7:35 AM · Report this
Banna 4
Yes, because if there's anything that irks me, it's that out-of-state businesses are not paying their fair share for infrastructure, education and services for states they don't reside in.

Let's let individual states make the whole country responsible for their inability to handle their own budgets by shifting the burden from the residents (who are responsible for the taxes now) because they can't or won't enforce their own laws.
Posted by Banna on November 27, 2012 at 7:50 AM · Report this
As I understood, it depends on the origination of the business. If I purchase my books through Powells, I don't pay any sales tax. If I purchase through amazon, I do. This doesn't make much of a difference for me. I make my decisions based on shipping costs. Amazon charges 3.99 for EACH purchase. Powells charges 3.99 flat rate for each order. Amazon profits off of their shipping costs. Sales tax is miniscule compared to shipping costs for most products. The issue really revolves around expensive purchases. For years, many Washingtonians went to Oregon to purchase new vehicles to avoid the sales tax charge. 2500 is a big chunk of change. They cracked down on this. One can get around this by registering under an address of a relative that resides in Oregon, but it is a huge hassle. An exemption for small businesses is quite understandable. It should be increased to 1 million though, with an understood COLA.
Posted by pussnboots on November 27, 2012 at 7:59 AM · Report this
So does this mean businesses will have to pay sales tax on a purchase in their own state and the state they are selling into?
Posted by Brandon J. on November 27, 2012 at 8:08 AM · Report this
wisepunk 7
Taxes everywhere are a rabbit hole of exceptions and loopholes simply to ensure the maximum existence of the industries and government around it. we should ultra simplify all taxes, cap deductions and use the extra money to hire enough collectors to go after the fuckers that don't pay.
Posted by wisepunk on November 27, 2012 at 8:16 AM · Report this
Goldy, you're wrong.

Small businesses in WA are already overburdened with tax collection and reporting with the fucked up idea of destination based taxes within the state, which require us to use faulty and ever-changing databases to guess and determine which municipality's rate we must use to determine sales tax, to report excise tax and to pay the damn taxes.

Opening the door to another pile of tax reporting obligations by saying that it will only be for the big businesses is bullshit. In the end, the government will lay the tax burden squarely on the shoulders of small and medium businesses while big business simply leverage their army of lawyers, accountants and lobbyists to avoid paying the taxes.

Deciding what's best for small business should be left to actual practitioners in the present day, not those who pontificate from vague, aging memories of the past.
Posted by Hey, Goldy, Stop Pimping My Ass To Tax Collectors on November 27, 2012 at 8:19 AM · Report this
@5: You might want to take a closer look at those shipping policies. Amazon's book and DVD shipping rates are cheaper than Powell's for all comparable shipping options. If Amazon is profiting off shipping, Powell's is profiting even more.
Posted by digitalwitch on November 27, 2012 at 8:25 AM · Report this
Goldy 10
@4 et al, A lot of misconceptions about how a sales tax works. Customers pay the sales tax, businesses are responsible for collecting it. So Washington would only collect sales tax on sales to customers in Washington state... people who do use infrastructure and services here. In fact, these customers are already obligated to pay a use tax in lieu of a sales tax. Most don't, as it's nearly totally unenforceable.
Posted by Goldy on November 27, 2012 at 8:43 AM · Report this
Goldy 11
@1 That you can't tell the difference between reasonable taxes and regulations and any taxes and regulations says more about you than it does about me. But in the real world one can be both pro-business and pro-government.
Posted by Goldy on November 27, 2012 at 8:45 AM · Report this
Matt from Denver 12
I'm going to preface this by saying that I fully support exempting small business from paying out-of-state sales tax. But Goldy's anecdote got me wondering about the onerous process of filing with each state directly.

I have to ask - is there no software that can pretty well do that automatically, if it's integrated with the sales software? Something that would do all the calculating and reporting, and only require a digital signature from the owner?

That might sound very naive. I'm not a businessman and I've never been in charge of the finances at any retail operation. So there may well be rules and/or regulations prohibiting things like that, requiring that the operations be somewhat manual. Or perhaps a fundamental and pragmatic reason to do it manually. Maybe you have to wait for 1099's or other forms from the bank first.

But it seems to me that computers ought to be able to do most of the heavy lifting of tax reporting, even for a small business. That's something that obviously wouldn't have helped Goldy in the 90s, but I wonder if there's a really, REALLY good reason why that can't be figured out today.
Posted by Matt from Denver on November 27, 2012 at 8:47 AM · Report this
@12 If a law like this does go into effect, you can be sure software will be sold that will deal with the patchwork of tax jurisdictions. Sellers will have no choice but to buy these products, face a dramatic dropoff in business or face legal action. However, it won't come cheap. Keeping all the rates/rules for every jurisdiction updated will require a lot of humans entering and correcting data. Such software may even be bundled together with services that actually pay and file the taxes on the seller's behalf. It could easily add up to another layer of costs equal to credit card merchant fees. All of which will be passed on to customers.

The better solution would be for Washington to follow Oregon's lead and dump the sales tax in favor of an income tax, but that's unlikely to happen any time soon.
Posted by decidedlyodd on November 27, 2012 at 9:04 AM · Report this
Matt from Denver 14
@ 13, nor will the other 40-something states that collect sales tax.

As far as the software goes, what if it was developed and sold by a company that already does small business accounting software? I would imagine that they already have people keeping up on everything all 50 states require.
Posted by Matt from Denver on November 27, 2012 at 9:16 AM · Report this
orino 15
Washington law already requires anyone who makes a purchase out of state (but not online) to pay a "use tax" that coincidentally is equal to the sales tax, but there is no enforcement whatsoever.
Posted by orino on November 27, 2012 at 10:16 AM · Report this
Sir Vic 16
Re: Tax software.
Such things are available, but they are absurdly expensive, keeping them in the "enterprise" class. Large accounting firms can afford them, not little guys, because they have trained staff. US tax code is designed to be difficult, requiring a lot of expensive labor to process. You can't just make a plug-in for Quicken or TurboTax and sell it for $50. We're talking about dealing with hundreds of municpalities, many of them total clusterfucks. The odds of getting quarterly tax remittances to all them without hassle are directly proportional to the amount spent on the effort.
Posted by Sir Vic on November 27, 2012 at 11:12 AM · Report this
Will in Seattle 17
I used to give away the software and charge for the support and other services instead.

Their are warehouse state/county/local tax collectors that will do it for you, for a fee. Which you add as a surcharge if the consumer doesn't pay it themselves.
Posted by Will in Seattle on November 27, 2012 at 11:20 AM · Report this
Banna 18
@11: That's what I meant when I said:

...shifting the burden from the residents (who are responsible for the taxes now) because they can't or won't enforce their own laws.

Instead of enforcing the laws as they are now, they're trying to enforce new laws on folks who aren't even in their jurisdiction.

Maybe the USPS should become a sales tax collector; force sellers to put cashiers' checks for the tax amounts in each package upon pickup, and the delivering post office just takes them out and sends them to the state before delivery.
Posted by Banna on November 27, 2012 at 3:23 PM · Report this
Been audited a couple times by DOR, WA. Once, pre-Internet and just last year. I work retail.
Re: the use tax, as a small business, I had to buy a part for my machine, which comes from Germany. Only ONE place to get it, from the distributer in Utah. I called, they shipped it, and then DOR said, I had to pay the use tax, because"you took your business outside of Washington, but used the product here". I protested, and he found a $16 subscription to Newsweek (this was 1996) and said, "if I wanted to, I can fine you for not paying a use tax on this magazine subscription."
So yeah, individuals don't pay it, but you can be sure every auditor is looking at it for businesses.
Posted by Up all night on April 22, 2013 at 11:31 PM · Report this

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