The Seattle Times editorial board argues that “Congress should enact consistent sales-tax laws to even playing field for Main Street businesses,” and I suppose that seems like a fair and reasonable enough objective. But do they understand that there’s no practical way of achieving this goal without putting tens of thousands of small entrepreneurs out of business, including many here in Washington state?
I know this because I started and ran a small software development and publishing company myself for about a half decade during the nineties, which at its peak consisted of me, my (not yet ex) wife, and a single employee. And had we had the burden of collecting and remitting sales taxes to forty-some states, we never could have afforded to stay in business.
The bulk of our sales during those years, maybe 70% of our unit volume, went through a handful of major mail order catalogs, and thus the bulk of our wholesale product shipped tax-free to the Airborne facility in Wilmington, OH. No problem for us there, and I don’t have much sympathy for big catalogs and online retailers who oppose efforts to collect taxes on interstate sales.
But the bulk of our profits came from direct sales, an outlet that would have been all but impossible to administer had we been required to collect taxes for every state and municipality in which we did business.
The mail order catalogs “purchased” our main product, a rhyming dictionary for Mac and Windows, at half the $49.95 MSRP, and generally resold it at the discounted price of $32.00. ($3.00 overnight shipping was pretty much standard at the time.) But I put “purchased” in quotes because that’s not really how the scam worked. Rather, we swapped product for co-op advertising, the price of a fraction of a page costing us thousands of dollars a month, per catalog, by the time we gave up.
If they sold enough product to pay for the ad, as they did every Christmas season, the catalog would purchase more, and we would make money. If they didn’t sell enough product to pay for the ad, as happened most Summer months, we would owe them money. The catch: they wouldn’t sell us Christmas if we didn’t advertise during the Summer.
We sold a lot of product over the years this way. But we really didn’t make much money.
Direct sales, on the other hand, that was mostly profit. At a $39.95 “discounted” direct price, plus about $4.50 shipping and handling for Priority Mail, we could realize 85% gross margins, and the credit card transactions went directly into the bank (as opposed to say, Multiple Zones, whose refusal to pay one Christmas season ultimately drove us out of business). It was a lot of busy work handling the direct sales, and they rarely amounted to more than a few a day, but I enjoyed dealing directly with customers, and the steady trickle of cash flow they created.
In our best sales year we grossed maybe a few hundred thousand dollars, but the cost of advertising was so high that we barely broke even on the 90% of units that went through retail. But the $20,000 to $30,000 a year in direct sales… that, plus a little contract work on the side, was often the difference between paying our bills and going deeper into debt.
And here’s where the Times’ sales tax proposal really strikes home, for had we been required to collect and remit sales tax for every sales tax state—and on any given year we shipped at least a few units each to every one of them—we never could have afforded to sell direct at all.
For example, for several years we displayed at the August MacWorld Expo in Boston, and sold product on the floor as a means of defraying some of the expense, and as such were responsible for paying Massachusetts sales tax on that few days of business. A hassle, but fair enough.
When we stopped exhibiting at MacWorld, and thus stopped filing taxes annually in Massachusetts, their Department of Revenue noticed, sent us a bill for a big late filing fee, and suddenly insisted that we file quarterly. For over two years I had to sporadically deal with Massachusetts’ demands, as late fees and interest accumulated, and threats escalated. I’m not really sure why they eventually dropped their collection efforts, but it probably would have just made sense to pay them the money I didn’t owe, rather than expending so much time and energy fighting it.
Now multiply that by forty-some, and you get an idea of what small businesses might face if sales tax could be charged on interstate sales.
Even the so-called Streamlined Sales Tax Project isn’t nearly streamlined enough for truly small businesses—and I’m not talking about the 100-person companies the Times thinks of as small, but rather mom & pop businesses like my own—if it requires multiple rates and remitting to multiple states. We never had the luxury of affording an accountant, and we certainly couldn’t have afforded one if the Times’ favored proposal had been law. In fact, with the accounting nightmare it would have created, we couldn’t have afforded to stay in business at all.
And thanks to the Internet and services like Ebay, the number of small time entrepreneurs making all or part of their living via direct, interstate sales has exploded over the past decade, taking advantage of an extraordinary online marketplace that would simply be impossible if every vendor had to take the time and/or expense to file taxes in every state that levies a sales tax. I have no gripe with the goal of protecting brick and mortar businesses from the unfair advantage enjoyed by the major online and mail order retailers, but not if tens of thousands of small entrepreneurs are flattened in the process, many of whom are just supplementing their income with a few hundred dollars worth of sales a month.
I’ve had this conversation with state legislators eager to stem the loss of tax revenue to interstate sales, and they’ve mostly brushed aside my concerns, telling me that third-party service providers will magically arise to fill the gap and process the sales tax for me… but at what cost? 5%…? 15%…? 20%…? And at what minimum transaction fee? At some point, and particularly on low cost items, selling direct ceases to be worth the effort.
Indeed, the whole Streamlined Sales Tax Project shows an utter lack of imagination on the part of legislators, and a total lack of appreciation for the role of really small businesses in our economy. For the bigger problem, at least here in Washington state, isn’t the loophole that allows interstate sales to go tax free, but rather our over-reliance on the sales tax itself. That the Times and our legislators would prefer to crush a vibrant economy of small, online retailers rather than address the real revenue problem, shows just how unready they are to lead our state into the 21st Century.
Good post! I just wish that state income taxes could be discussed rationally here in Washington.
Pigs will be flying into Hell with six-packs of cold Heineken strapped to their backs before the people of Washington will enact a state income tax. I will never support a state income tax here, and I’ll work diligently against establishing one.
The product of The Seattle Times is exempt from state sales tax. Consistency requires this exemption be eliminated.
Funny how the larger the scale of the public/private relationships the more trend toward functionally low-choice-Soviet in flavor. Or something like that…
Did a small business with multiple taxing districts, technically involving not just cities and counties, but cemetery, fire, maybe other taxing authorities. I ‘carelessly’ grouped things into cities and counties. Gad, and even then did not break down anything lower than a hundred or two. But I did report everything.
2 PI
Why? Some attempt at reasoned justification would be interesting. Something more nuanced and fact-based, please, than “Taxes bad. Hulk smash!”
Ihtink that it is lunacy to attempt to tax Internet businesses as if they were brick and mortar. In Internet business, the traditional concepts of location are pretty fuzzy. If a customer in Seattle contacts an Internet business in Canada to ship a pack of cigarettes from a supplier on South Carolina to his brother in Indiana, and pays for it using a bank account in California, which taxes should be applicable? If it is all interstate commerce, how can state taxes apply?
Here’s an example: Amazon sued the state of NY, asserting that the state’s attempt to collect sales tax from them is unconstitutional.
Sample issues from the case:
It’s a hard problem and I don’t think our patchwork state-by-state hodgepodge is the solution.
@2 Hell’s gonna be a mighty crowded place.
“It’s a hard problem and I don’t think our patchwork state-by-state hodgepodge is the solution.”
Abolish sales taxes at State/local level and go for some kind of national VAT? “States” are so archaic.
@3 Absolutely. We wouldn’t want Frank Blethen, who just walked away from Olympia with a 40% tax cut, to be guilty of hypocrisy would we? We need to have a sales tax on newspapers so publishers like Frank aren’t the flaming hypocrites they are now.
“Pigs will be flying into Hell with six-packs of cold Heineken strapped to their backs before…”
Actually, that has already happened, but it was a much better beer.
@4 Do not copy, do not copy, you are coming in garbled, repeat, you are garbled, over …
@9….”@2 Hell’s gonna be a mighty crowded place.”
And here I thought it already was.
@7 It’s gonna be fun to watch the states fight over who gets the tax on that transaction, isn’t it? Will California deploy their National Guard on collection patrols? Will shots be fired at the Indiana border? Stay tuned for Civil War 2!!!
@14 It is, but if you add pigs to the Republicans already there, it’s gonna get even crowdier.
Online retailers have a couple of big competitive disadvantages: Inconvenience and shipping charges. The absence of a sales tax usually is offset by shipping costs. If you had to pay Washington sales tax on everything you buy online, you won’t buy anything online except stuff unavailable locally, and that’ll kill off an awful lot of online businesses. Including some very big ones.
Another problem is businesses have to collect sales taxes for the state essentially for free. A large business like Costco or Wal-Mart can afford to automate this process in their computer systems. But having to manually calculate, charge for, collect, and remit sales tax on every transaction will absolutely destroy the feasibility of countless small startups that rely on online sales. There should, in any event, be an exemption for microbusinesses from collecting taxes, say anyone doing less than $100,000 gross a year.
@4: “Funny how the larger the scale of the public/private relationships the more trend toward functionally low-choice-Soviet in flavor. Or something like that…”
Take our Department of Defense, for example.
@4: “Funny how the larger the scale of the public/private relationships the more trend toward functionally low-choice-Soviet in flavor. Or something like that…”
Yes! I demand many kinds of electricities now, now, now!! Let the market bloomski!
Puddy swings and connects … grand salami!
Hey Pelletizer, here is the other comment you wrote:
Damn, that was easy.
http://horsesass.org/?p=17742#comment-929159
What a liar! A Putz! A Schmuck! Why don’t libtardos remember what they write. Well he is an old decrepit dumb bunny!
@21: Completely irrelevant, as usual. We’re talking about how sales taxes are not the most efficient ways for governments to raise revenue… and you’re talking about what, exactly?
Dummo Kid, WTF? Taxes. Puddy implementing Pelletizer rules here. Pelletizer claimed the reason Mayor 2 Nickels was closing parks implementing beach burn bans, not having snow removed from Seattle streets was due to taxes!
R U a dummy too for not remembering Pelletizer said about the need to raise taxes?
Goldy is misleading people again. This isn’t a Seattle Times proposal. Goldy said, “And here’s where the Times’ sales tax proposal really strikes home …” Wow. His obsession with the Seattle Times is bizarre. The Streamlined Sales Tax Project is something 22 states are already doing. It has nothing to do with the Seattle Times, as Goldy claims. They simply wrote an opinion about it, now Goldy is twisting to make is seem like it’s their idea.
Goldy is losing it.
@21 My mistake — when nobody pays taxes, you get no snow removal. Dumb me … but you’re even dumber.
@23 “Pelletizer said about the need to raise taxes?”
This is exactly what I mean about puddinghead being a dumbshit. I was talking about wingnuts complaining about paying existing taxes.
I never said anything about raising taxes, but pudpacker never misses an opportunity to misrepresent what I said.
Troll @24…
It’s called a springboard. Get a life.
@26Pelletizer, all over this blog over the years you’ve complained over Tim Eyman and his tax proposals. Except the faulty snow removal was not due to any thing about taxes fool!
And Puddy is misrepresenting your position. Nope you Dope!
WHAT A CROCK of Pellets
Tax policy AND it was long, what, ya trying to kill me, bore to death.
National sales tax, just in time for state income tax, uh, right?
No wonder goldstein posted that government shouldn’t be run like a business, his notion of business administration involves debt and failure.
This is why there should be separation of liberal and business, or liberal and any successful endeavor for that matter.
happy @30,
Um… credit (what you disparage as debt) is the lynchpin of our modern capitalist economy (hence the current economic crisis), and yes, most business startups end in failure.
I’m guessing what makes you so happy as an old Republican is your ignorance of the real world.
I worked at a dot-com in the late 90’s, and there were a couple of off-the-shelf software packages all ready to go to hook up to online “shopping carts” to calculate and charge sales taxes for all 50 states. We installed one in our system, but never had to turn it on.
@17 I’ve been buying computer parts and other items from online retailers more and more in the last couple years. Assuming I can wait a few days for surface transporation, the shipping charges are hardly more than the cost of gas to drive to Fry’s or some other place to buy the same stuff in person. This doesn’t even begin to factor in my not having to commit half a day or so of my time, for which I can otherwise find a much more pleasant use.
On the other hand, things that are bulky and/or perishable (like a bunch of groceries from Costco) or clothes that I have to try on, are another matter. Who wants to have to return a pair of pants because they fit like a cheap hotel?
No Goldy, ranting about the perfect world you can’t obtain by taxing the unemployed and giving credit to those that will not and cannot repay,
the companies issuing this credit should have to take the loss, not the American people.
When Americans start honoring their word again and repaying thier debt, then and only then will we see a change.
Credit is debt, any way you look at it.
Getting what you want now, not having to save or consider the action of buying something you cant afford, thats the country today, That is reality.
This country’s economics seems to have started on cash or trade not cap and tax.
This country would have brought itself out of the recession, it has several times with out big bail outs and government stepping in and raising any taxes or running any business.But this is what dems and liberals want, higher taxes and the government running EVERYTHING.
So you get what you vote for,its not a Republican thing its American thing.
If you think small business is in trouble now………Oh BTW have you got your free money grant yet to open a small business, Just asking.
@34
There isn’t anything wrong with debt, debt greases the wheels of commerce. Hell any time a business gives you net 30 payment terms they are letting you go into debt.
The key with debt is how you use it. Some uses are better for a business or individual than others. Sometimes it depends on how long you take to pay off a particular loan.
To imply “debt is bad” and by extension no individual, business, or government is naive in the extreme and shows no understanding of economics, business, or even personal finance.
@35 Debt is a little like a gun. It all depends on how (and for what) you use it. One of the lesser possible consequences of doing so rashly is a hole in one’s foot.
@35…..
You are correct to a point, and I think #34 was trying to make a different point. It seems we have gotten to the point that EVERYTHING operates off of debt. Need proof? Just look at how our federal govt operates – or just look at the consumer debt that the average household carries. I am sure we(well most of us) remember when our parents and grandparents constantly extolled the virtues of saving money, not buying things until we had saved up enough money to pay for them outright(or for that matter, not spitting out kids until we were financially ready – thats a whole ‘nother subject), etc…. Going into debt to purchase large ticket items, such as a house or car is one thing – running up debt to have a flat screen, x-box, blu-ray, ski-boat, annual trip to hawaii, and the like is just plain assinine. yet that is exactly what we as a nation are being told to do – and have done.
Just like civics courses, public schools no longer teach household finances and how to balance a checkbook or institute long and short term saving plans. I remember taking just such courses in HS in the 80’s – back before the days of the BS PC classes kids now are required to attend.
Anyway, I guess the big change I have noticed over the last 3 decades is that more and more people see debt as no big deal, and operate their daily lives and expenses around it – not just for car payment or mortgage payment. People have become anesthetized to it – just like our government has. And when this group of big spenders/no savers hits retirement age, guess what – they have NO Money to live off of. And swooping into the rescue is the federal govt to take care of them – and you can see how we come full circle.
You cant spend your way out of debt. Period. End of story. Oh sure, you can manipulate the numbers to see some sort of short term gain(as our government is counting on to appease the masses), but it will ALWAYS fail in the long term. This is not a 2 or 5 or even a 10 year process – it is a 30, 40, 50 year process…and guess what year we are in?
If you want to pay the state income taxes, fine: send ’em a check, but leave me out of it.