For years, brick-and-mortar retailers have been complaining that online retailers (or e-tailers) have been exploiting an unfair advantage. Bill Hughes, an executive with the Retail Industry Leaders
November 5, 2022
Case Study Raise Taxes?
Please read the following case study and answer the questions at the end of it. Your answers should be at least 2-3 sentences each. Please pay attention to grammar and spelling.
For years, brick-and-mortar retailers have been complaining that online retailers (or e-tailers) have been exploiting an unfair advantage. Bill Hughes, an executive with the Retail Industry Leaders Association, says, “For too long the Main Street retailers that are an integral part of their communities have faced tax rules that put them at a disadvantage to their out-of-state, online-only competitors.” So what is this great advantage that e-tailers have? Sales taxes. Companies that do not have a physical presence in a state in which they sell are not required to collect sales tax on those purchases. Essentially, this means that every e-tailer has a natural 5% to 10% price advantage over brick-and-mortar stores.
That advantage, however, may soon be disappearing. The United States Senate recently approved a bill that would require e-tailers with more than $1 million in sales to collect sales tax. This would represent an incredible win for brick-and-mortar retailers like Target, JCPenney, and Best Buy, who have been struggling for years to compete with online stores. By collecting sales tax, the e-tailers’ automatic price advantage would be wiped out overnight, creating a more level playfield for all involved.
Led by eBay, a large number of small, online vendors are protesting this law, and have spent $2 million to lobby against it. They claim that small e-tailers cannot afford the staff or infrastructure that collecting sales taxes makes necessary. They argue, correctly, that it is not as simple as entering figures into a formula. Rather, they need to keep a separate set of records for each state—and also each municipality and county with different tax rates—that they make sales in, and then, either quarterly or monthly, file a return, again with each state, municipality, and county. How can a small company with a tiny staff, they argue, ever hope to keep up with the mountain of impending paperwork? Some small online sellers have already planned on reducing their inventory and sales to avoid the sales tax hurdle.
Traditional retailers, of course, are strong proponents of the online sales tax. So is, quite surprisingly, Amazon.com, which spent almost $3.5 million lobbying for the bill. Even with charging sales tax, Amazon has a significant price advantage over its competitors. But as the online retailer has grown, it has become more reliant on next-day delivery and has begun building distribution centers in numerous states. That means, it will have to start collecting taxes anyway in every location where it has a distribution location. Also, its warehouses and shipping centers are far more cost effective and efficient that brick-and-mortar stores. In short, retailers and smaller websites will never be cost competitive with Amazon, and so there is little reason for the e-commerce giant to oppose sales taxes.
1. Do you think taxing online purchases will help retailers restore competitive balance against online sites? What other advantages do e-tailers have that might make the issue of online sales tax irrelevant?
2. A big online store like Amazon would have little trouble dealing with the costs of collecting sales tax. Smaller sites, however, faces a tremendous staffing and work burden. One count indicates that there are over 6,000 taxing entities in the United States (states, territories, cities, counties, villages, and Indian Nations), each with different taxing structures. For smaller e-commerce companies, is forcing their annual sales to drop below $1 million a good option? What other options do they have to stay viable?