Internet sales tax push could threaten e-tailers

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Jim Reeder, CEO of Consider it Sold, photographs a colorful vase for his eBay service.

With eBay sales increasing each year – 36 percent last year alone – state governments are seeking to cash in on the e-commerce bonanza.
And e-tailers like Jim Reeder and Steve Plentka of Consider it Sold are going to Washington to take on lawmakers who want to charge a sales tax for each item sold via the Web.
Reeder and Plentka plan to join eBay lobbyists in March to urge Congress to vote against laws that would allow cities, counties and states to charge a sales tax on any item sold to residents. The law, the two said, would shut down their increasingly lucrative eBay business. With more than 100 million members, eBay represents a large population of small online retailers.
“Just the labor costs – tracking what sales tax we needed to charge in every state, every county, every city – would effectively prevent us from selling across state lines,” Reeder said. “If we sell a $6 item with a 6-percent sales tax, we could only afford to spend three minutes for the paperwork required to send the tax payment to the necessary place. We would need to raise prices so high, we couldn’t do business.”
Under current law, retailers only collect sales taxes in states where they have a physical presence. They are not required to collect taxes on purchases sent to other states. The Supreme Court ruled in 1992 that forcing remote sellers to collect a sales tax in states where they do not have a physical presence would constitute an undue burden on retailers.
Until local governments simplify the taxing process, states cannot collect taxes on Internet sales. That’s where the State Simplification Tax Project comes in.
“Certain states feel they are getting cheated by e-commerce,” Plentka said. “Those states with budget deficits see this as a way to gain money. We’re strongly against this idea – we won’t be able to sell across state lines. We’re not just talking about 50 different sales taxes in each state, but there are thousands of counties with different rates. It’s just not economically feasible for us.”
More than 30 states are members of the simplification tax project. They are waiting for federal legislation to pass before they begin collecting the sales tax. Many e-tailers are anticipating the decision this year, as states seek to cash in on Internet sales revenue.
“Congress is considering a law that would require online merchants to collect and remit taxes to 45 sales tax states,” according to an eBay Web site warning to its members. “eBay opposes raising taxes on the Internet or its uses, as well as any attempt to impose remote sales tax collection burdens on the smallest sellers who can least afford it. This is certainly not the time to impose a major new tax burden on Internet vendors working to implement successful new business models, nor is it a wise macro-economic policy to impose what is effectively a tax increase on American consumers.”
A study conducted by Donald Bruce and William Fox, business and economic research professors at the University of Tennessee, estimates that the local sales tax loss on all Internet sales will be $54.8 billion by 2011. The study also estimated that sales tax rates will need to rise between 0.83 percent and 1.72 percent to replace revenue lost through Internet commerce.
“Measuring the states’ e-commerce revenue losses against their total state tax revenues also shows a significant impact,” according to the study. “In 2011, states will lose anywhere from 2.6 percent to 9.92 percent of their total state tax collections to e-commerce losses.”
Consider it Sold operates as a Web consignment dealer for business, nonprofits and local residents, selling hundreds of items each year – everything from used school buses to grandma’s old china and antique jewelry. While business is profitable, Reeder and Plentka said tracking a state sales tax on every purchase would cost them time and money – and possibly shut down business.
And Internet business is booming. According to an eBay survey, Consider it Sold is just one of 724,000 sellers who rely on eBay for either primary or secondary income. Ebay’s profits for 2005 equaled $1.39 billion, while eBay sellers sold more than $20 million in products.
Like many eBay retailers, the two certified engineers opened Consider it Sold when the high-tech company they worked for closed. Already familiar with the popularity of eBay, they decided to open an e-commerce business.
“Well, Jim, he’s a Mustang fan. He was buying car parts on eBay. I had been buying computer mother boards,” Plentka said. “And I had a business license, so I’d buy 10 of them, use one or two and sell the others on eBay. It got to where I was working more on the ‘hobby’ at eBay, than I was building computers.”
The online business takes items from customers, photographs them, writes a professional advertisement, pays the eBay fees and sends the package to the seller, charging the original owner a commission on the item.
“If it sells for $500 or less, we charge 35 percent,” Reeder said. “For anything more than $500, we charge 25 percent.”
Currently, the business has 322 items listed on eBay’s Web site, including jewelry, dolls, books and electronics. Another 300 items are waiting to be listed, Reeder said.