Tuesday, April 23, 2013

Perfect Example of Government to Private Sector Disconnect

If you haven't heard, the Senate just passed a bill 74-20 that will require online retailers to gather sales taxes based on the purchaser's address.  This is something that on a consumer side could be very costly, not only for the consumer who may end up paying as much as 6, 10, or even 12% in some areas in additional taxes.  Having grown up in Tennessee where the tax can be as high as 9.75% and I could not stand how much extra I had to pay.
Then came websites like Amazon that allowed you to buy the exact same items as in the store, but didn't require state sales tax because they did not have a distribution center in the state.  And at nearly 10%, the shipping cost of most items was less than the sales tax on most items over $100.  Then when Amazon included free super saver shipping on items over $25, my brick-and-mortar shopping diminished down to groceries and must-have items.

That's the consumer side of the bill, however I am more concerned about the company side of the bill and how it's going to affect their business.
1) Companies now will have to track every single transaction, where it is shipped, and will have to file a sales tax form for every single locality that has even one transaction.  There are over 7,500 different sales tax jurisdictions in the United States (with over 1,000 tax code changes to keep track of in the last year alone).  Look at this map below (Source: Journal of Accountancy) This represents every single sales tax locality in the United States.  And don't forget, many localities charge different tax rates for items based on their use.

In 2010 Amazon reported 13.7 Million items were sold to addresses all over the world on JUST Black Friday.  The logistical nightmare of this task is enough to make accountants all over the country cringe. iTunes is another company whose accountants will feel the hair on their neck stand up if this passes with an estimated 1.2 Billion sales for just music in 2007.

2) Companies may lose revenue based on this.  As mentioned, for two items priced the same, the difference in having to pay sales tax may be enough to justify waiting to get the item.  A perfect example of this is the Electronic Arts' online retail outlet, Origin.  There you can buy video games, start to download them immediately, and not have to pay sales tax.  Origin is not able to reduce the price of their games because they have to ensure that the big box stores like Best Buy, Wal Mart, Target, etc... are able to sell their copies as well.  With that being the case, the only benefit this site has over some place like Best Buy is the fact that you don't have to pay sales tax on your new $60 video game.  This effect may not be great for other websites who offer discount prices, but for some (like Origin) it may completely destroy their entire business model.

Why would something like this bother me?  Because it shows just how much of a disconnect there is between the government and the private sector.  A legislator looks at this bill and decides "Hey, this looks easy enough." and votes yes without researching how amazingly complex this task will be for companies to keep track of.

Chalk this up as yet another reason why I believe we need "Professionals who are legislators", not "Professional Legislators."