Let's rename it the “eBay Loophole.”
For more than a decade, Amazon led a ferocious lobbying campaign in Washington against a law to force online merchants to collect state and municipal sales tax from their customers. Local and national retailers with brick-and-mortar stores complained that online merchants were enjoying a tax-free ride — they don't have to collect state sales tax unless they have operations in the state — and getting an unfair advantage. The tax treatment was widely known as the Amazon loophole, until Amazon dropped its opposition of the tax. (More on why Amazon did that in a moment.)
In Amazon's place has emerged its smaller rival, eBay, which has taken up the cause with a major campaign against the tax just as the issue is moving through Washington for the first time in earnest. On Monday, the bill cleared a procedural hurdle in the Senate, setting it up for a vote this week, and President Barack Obama said he supported it.
Over the weekend, John Donahoe, eBay's chief executive, sent out an audacious email to tens of millions of eBay merchants, pleading with them to write their representatives in Congress to block the legislation.
“This legislation treats you and big multibillion dollar online retailers — such as Amazon — exactly the same,” wrote Donahoe. “It may harm your ability to grow and costs jobs, including yours.”
Talk about being heavy-handed.
Most of eBay's sellers have less than $1 million in out-of-state revenue and, under the terms of the proposal, the Marketplace Fairness Act, would be exempt from collecting the tax anyway.
It isn't until the end of Donahoe's letter that he argues for a compromise. If there is action, he wrote, the bill should be changed so that a small business is defined as making less than $10 million in out-of-state sales or having fewer than 50 employees. “To put that in perspective, Amazon does more than $10 million of sales every 90 minutes.”
Donahoe, who deserves credit for turning around eBay in recent years, isn't trying to protect the small mom-and-pop store or the struggling artist, he's trying to keep substantial businesses with real revenue from paying taxes.
Part of eBay's argument is that it is too complicated and expensive for small merchants to collect the tax. “Are you prepared to collect sales taxes in the more than 9,600 tax jurisdictions across the U.S.?” Donahoe asked.
What Donahoe did not mention is that Amazon will already collect this tax for merchants if they ask, and eBay will help provide them with third-party technology services that will help them do this, too. There are a number of companies that will manage and streamline the process, like Avalara or TaxCloud. And you have to believe that if the bill gets passed, there will be a cottage industry of companies that will offer services to collect the tax, including eBay, which has made a reputation trying to streamline the selling process for merchants. In fairness, eBay also argues that a cost of complying with enforcement will be a nightmare. Think about the prospect of an out-of-state tax audit.
Before we continue, a little history: The reason the online merchants don't have to collect sales tax is a function of the Supreme Court ruling in 1992 in Quill Corp. v. North Dakota. In that case, Quill, a mail-order office equipment retailer, was sued over what North Dakota said was taxes due because Quill shipped products to the state. The court ruled that merchants did not have to collect taxes in a state unless they had a physical presence in the state. This covered mail-order businesses and, yes, the then-nascent business of Internet retailing. (Amazon didn't even exist then.)
A note to readers, and to self: If you live in a state with a sales tax, you are supposed to submit uncollected taxes on Internet purchases at the end of the year, even if the merchant doesn't seek it at the time of the sale. Of course, nobody does that.
At a time when states are desperate for revenue, you can see the allure of taxing online merchants. According to the National Conference of State Legislatures, $23 billion is lost annually from out-of-state sales, a considerable portion from online transactions.
There's an argument to be made, which eBay does, that the sales tax is regressive for businesses — and it is. The tax does not discriminate between a large, national retailer and a mom-and-pop. The tax is flat. And big business already has special tax advantages: States often offer big companies tax incentives to build stores and distribution systems, things that are not offered to small businesses.
But on the flip side, there is an argument that the current state of sales taxes online is regressive for consumers. Poorer people are less likely to be able to benefit from being able to shop online.
So what about Amazon? Why did it abandon the fight?
Not because it felt altruistic. It was a business decision. As Amazon has grown, it has become better positioned to handle the tax hit. And perhaps more important, it is moving to build physical warehouse and shipping centers in many states so that it can offer faster delivery services, in some cases within 24 hours. That means it would most likely have had to collect sales tax anyway.
In the end, it is unclear whether the Republican-controlled House will approve tax legislation if it clears the Senate, as expected. But when consumers make purchases, either in a store or online, they should be prepared to pay the requisite sales tax. And, yes, merchants and lawmakers should provide the way to collect it.