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The battle for online taxes – the devil is in the details

Let me start by saying that I work for Quest, and we have no formal partnerships with Amazon, nor do we compete in any way that I can tell. Personally, I happen to be a satisfied (retail) customer of Amazon, but have done very little with their IT/Online services, beyond putting a bunch of MP3s in their CloudDrive.

The purpose of this post is to get everyone thinking about the complexity of online tax collection. Everyone sees it as a black and white issue, and it's not. It's not just the retailers "protecting their customers" and it's not just a single state or county that is having a revenue shortfall that needs this money. There are a lot of nuances that people do not consider when making their arguments in either direction. Personally, I'm on the fence as to whether online businesses ought to collect local taxes but I think my experience can help shed some additional light on the topic, as a whole.
I had a colleague on the State & Local Government side send me an article about how Amazon needs to just "man up" and help the states. The full title and link for the article is:
Why Amazon is winning online retail and should fold on this silly sales tax fight

One of the last paragraphs of the article states:

"Rather than fighting it out on a state-by-state basis, and yanking on the incomes of their affiliates while they’re doing it, Amazon needs to man-up and do what’s right."

And my response to the whole article was, "It's an interesting, if light, article." I went onto say that the author, whilst championing the States' case for collecting online taxes, completely overlooked the real problem with doing this. The problem is not just the fact that consumers wouldn't like the 5-10% hike in prices. The problem is that it would drive up prices considerably, and take any competitive edge Amazon has away. David Gewitz overlooks a key financial factor that is a huge obstacle for anyone collecting taxes for online sales. And that is the cost of manning and maintaining a "Sales and Use Tax" department. What's that, you say? Why would you need a "department?" Can't all this be automated?

Well, not quite. For a retailer of Amazon's size, you're talking about getting dozens of tax analysts and clerks to handle this because there are thousands of jurisdictions. And because you're talking about thousands of jurisdictions, with millions of different rules, codes and policies, often open to interpretation, you need humans. You would need to add more labor, (and supporting systems) to deliver the same products and services. I know, as I was one of these humans at one point.

In a previous life, I worked for a company called Tax Partners as a Data Development Manager. Tax Partners has since been bought by Thomson, and it's impossible to find a nice, clean link on their site for what Tax Partners did, but what they did was manage outsourced Sales & Use Tax filings. These would often be for companies that deal with consumers in retail, telecomm, automotive, travel and other sectors. These were Fortune 1000 companies, that had a presence in hundreds and thousands of locations. And my job was to manage the development team that would write systems to take the client's tax data, and normalize it to fit into our system, which was then used by our internal tax analysts.

Now, here's where the details come in, and I'll use a single client as an example. Imagine you're a telecommunications company, and you provide cell phone service nationwide. You have to collect a ton of taxes, and all those taxes are a liability. You have to pass them onto the respective jurisdictions, so you really don't want to hang onto this money. The short term interest sounds interesting (pun intended) but it's not nearly enough to justify having to deal with this money. So while you get this money, it is only a burden to you, and you really don't want anything to do with it. I can tell you that one large, US telecomm was paying $80-95 million per month in taxes. However, that money would have to get divided among 5,000-9,000 different tax returns! Just try to wrap your head around those numbers on a monthly basis for 1 customer.

In some cases, the returns would only total as little as $5 or $10, but they were required to submit them. And everything had to be accounted for, with the money divided properly among the various jurisdictions in a state, even though you collect a lump sum from your customers. Oh . . . and those returns . . . often, they were a specific form, written by some policy maker, that said the form, in that exact format, must be submitted on the 10th of the month after business was closed. And perhaps even in blue ink! Now spread that out over more than 9,000 jurisdictions. And if you don't file, you not only get hit with interest, but a potential penalty. And that penalty may be $500 for a $10 return.

So, while each jurisdiction wants it's money, they're not exactly the easiest group to work with. It's one thing when you're a business with a physical presence in a location, and know what's going on in that location, but when you sell to people in places you've never heard of, it's rather hard to keep up with the rules and regulations that jurisdiction puts out. There's a cost to that, and it's not as easy as a company in the UK, that simply adds the same amount of VAT to everything. My colleague added:

"The states believe there is a river of tax money flowing by and they aren’t dipping into the stream.  They’re very thirsty right now."

They may be thirsty, but they're not very accommodating. Would that every jurisdiction used a common form, accept electronic feeds and transfers, and provided their rate information in an easy to use manner, it might be feasible. But the way things stand now, the cost (to a business) for collecting online taxes is very high, and there's one more thing. I mentioned before that if you get the taxes wrong, you could be facing a penalty. That penalty is often arbitrary, set by a judge in that very jurisdiction. Which means the odds are stacked against you, even if you make a good faith effort to help the states, as Mr Gewitz suggests that Amazon do. At best, you can "meet expectations" at a considerable cost to you. At worst, you could get it wrong, and get hit with enough fines and penalties to put you under, all while trying to "help the states."

I do agree that the states and other jurisdictions need help, and that there is a revenue stream they could tap into. But it's not by applying 20th century rules and methods to a 21st century problem. I have my own ideas on what can help, but this post is long enough as it is. Thanks for taking the time to read it.

Copyright (C) 2010-2011 Dmitry Kagansky – All opinions expressed are those of the respective author and do not reflect the views of any affiliate, partner, employer or associate.