The conflict between President Donald Trump and Amazon has the potential to change the way small-and-medium-sized retailers do business online.
For years now, the issue of internet sales tax has been a lit match held to a public policy fuse. Earlier this month, that fuse got significantly shorter once the President weighed in on the issue, as he publicly shamed companies that are not collecting their fair share of local taxes. At the same time, the Supreme Court heard oral arguments on this debate as a part of South Dakota v. Wayfair.
The crux of the issue is this: Under current federal law, remote sellers are only required to collect sales taxes on purchases if they have a physical presence in the state where the goods are sold. The burden for paying the local sales tax on those transactions falls to the end consumer, who rarely ever pays these taxes. The end result is an estimated $17.2 billion in local sales taxes that go uncollected each year.
Amazon has actually been very proactive on this issue. The company announced in March of last year that it would voluntarily collect tax in every state that has a sales tax (45 states), regardless of whether or not they have a physical presence in that state. However, Amazon is not responsible for collecting state taxes on sales made on its platform by third-party sellers.
That burden falls to those affiliate sellers, who tend to be small-and-medium sized vendors. But it's a complicated matter, because they are often not set up to collect this tax. Doing so would require an exceedingly sophisticated approach to local sales and use tax collection that would allow these sellers to accurately capture all of the sales tax on every transaction in compliance with every state's respective sales tax rate. That's not a problem for companies that have invested in enterprise software designed for this task, but it's a far bigger challenge to smaller companies who have not historically operated in multiple markets.
But the lost tax revenue is significant, and that's got states actively working on ways to collect from remote sellers. Amazon's annual letter to shareholders shed some light on just how much tax revenue isn't being collected, and the numbers were stunning. Amazon says that third-party sales now make up more than half of Amazon's total online marketplace unit sales.
That means tax authorities around the country have all the reason in the world to capture that lost revenue for their coffers. And depending on how the Supreme Court rules, or how eager Congress is to act on the issue, it might not be long before these third-party sellers could have their worlds flipped upside down.
Reading the tea leaves both at home and abroad, there's reason to think this issue has moved up to the top of the list of priorities for many tax authorities. In Europe, as my colleague Joe Harpaz noted, the EU just proposed a blanket 3 percent tax on all tech firms with revenues above 750 million euros ($924 million). And this March, as my colleague Alex Paladino mentioned, the spending bill President Trump signed to fund the government through the end of September originally had an internet sales tax attached to it, before it was pulled out at the last minute.
Believe it or not, a federal, standardized law may be in the best interest of these Amazon affiliate sellers. Without the structure or capacity to build tax collection apparatus in 45 different states, third-party sellers would benefit greatly from one federal rate that would simplify matters. But that doesn't mean that is necessarily in the future, particularly with a party in the majority that often comes down on the side of state's rights.
Until retailers get more clarity in the form of the Court's decision and/or a legislative agenda, there's no telling what will be the law of the land. But for the meantime, a company that sells goods on Amazon needs to proceed with caution and get their ducks in as neat a row as possible. Their future economic viability could depend on it.