A Fair Arrangement: Missouri to explore internet retailer sales tax
It’s the age of the internet, and consumers are filling their virtual shopping carts to the brim. In 2017 alone, Americans spent $453 billion on online retail purchases, a 16 percent increase from the year before.
Competition between local businesses and online sellers is here to stay. But in many states, Missouri included, local businesses have to compete on an unlevel playing field due to laws that don’t require out-of-state internet retailers to charge sales tax.
“As a brick-and-mortar retailer, it puts stores like mine at a disadvantage,” TJ Nigro said.
TJ and his wife, Dana, have owned Village Gardens for 34 years. Online competition in the flower business mainly comes through international websites that send orders — free of sales tax in Missouri — to local florists after taking a cut off the top.
“You can order online at Village Gardens. But on Google search, [those websites] pay $9-10 a click to be at the top of the list. We can’t compete with that, so the real florists are much lower in the search results,” Dana Nigro said.
For some goods, the competition is even tougher — such as when Village Gardens briefly tried offering a selection of wedding gowns.
“Young ladies would come in and use our dresses there as a try-on shop, to see if they liked it, and then go order the dress online,” said TJ Nigro. “In the meantime, every time that gown gets put on and taken off, it’s getting wear on it and the zippers are zipped and unzipped. Then pretty soon, the retail value of it has shrunk.”
Yet Nigro and other local retailers see hope in the fact that Missouri lawmakers are exploring ways to finally bring fairness to the marketplace. It’s an effort that is gaining momentum thanks to a recent U.S. Supreme Court decision.
THE WAYFAIR RULING
The U.S. Supreme Court set the stage for this year’s sales tax discussion with its decision in a case called South Dakota v. Wayfair.
A little context: In 1992, the Supreme Court ruled in Quill Corp. v. North Dakota that a state couldn’t require a business to collect sales tax in that state unless the business had physical nexus there, such as a building or an employee.
After decades of debate about that Quill standard, Wayfair was a similar case that allowed the Supreme Court to revisit the ruling. In June 2018, the Court overturned the physical nexus standard and allowed a new standard for collecting sales tax: economic nexus, which hinges on the amount of sales or number of transactions that a retailer has in a state.
The Court also issued guidelines to help state legislatures implement new sales tax laws in a way that doesn’t place an undue burden on interstate commerce.
Several states, including Missouri’s eight neighboring states, have a head start in this work because they have already adopted legislation called the Streamlined Sales and Use Tax Agreement.
Missouri has not implemented the agreement. Another challenge facing Missouri is that our state has over a thousand local sales and use tax jurisdictions, said Joel Walters, director of the Missouri Department of Revenue.
“That makes it more difficult for Missouri than perhaps some other states to enact a statute like this,” said Walters. “So that leads you back to Streamlined as one option to deal with it.”
Walters said we will likely see the General Assembly discuss the Streamlined Sales Tax proposal again in 2019 — and it may be a higher priority thanks to Wayfair — though he noted it’s not the only possible means of paving the way for internet sales tax.
The other important thing for lawmakers to do, Walters said, is make sure we implement a threshold consistent with that of other states.
“What would the world look like if 50 states all had a different standard or had different standards for different industries?” said Walters. “That’s actually not what anybody wants. What we all want is a similar standard, a similar set of rules that will be much easier for businesses to deal with.”
So how much annual sales tax revenue has Missouri been losing?
Walters didn’t give a specific number, but he said many estimates don’t take into account the fact that many online sellers have already started collecting the tax. For example, the online retail giant Amazon began collecting Missouri sales tax in February 2017.
“I would be very cautious of thinking that it’s a really big number. I think it’s probably a smaller number than most people think it is. But it probably is a material number if we were to start collecting,” Walters said.
In all, it’s more a matter of marketplace fairness than raking in millions in new revenue.
“I don’t like being in a world where the tax laws give a competitive advantage to one business over another business,” said Walters. “I’d like to see the taxes be applied equally to everyone and let the market decide who wins and who loses.”
That sentiment is shared by Tom Meyer, who runs Meyer Music. Meyer Music offers pianos, band and orchestra instruments, and private lessons.
“A piano is still a product that most people are not going to buy sight unseen online just by reading some reviews,” said Meyer. “They’re still going to want to go and touch and feel and look at it and get recommendations from their piano teacher as to what they should get.”
It’s a different story when it comes to easily shippable items such as electronic keyboards, woodwinds, and string and brass instruments.
“Ours is right at 8 percent,” Meyer said, referring to his business’ state and local sales tax combined.
He punched the numbers into a calculator: For one of his store’s electronic keyboards with a price tag of $2,495, the tax adds nearly $200 to the final cost.
Meyer often has to give clients the pitch that the ability to examine the instruments in person, guarantee quality before they purchase, get any questions answered by Meyer Music’s staff and have access to the store’s repair technicians make it well worth buying locally.
“We feel like there’s a tremendous amount of added value — not only from our knowledge but just from the traditional way of doing business,” Meyer said.
CHAMBERS SPEAK OUT
Implementing an internet sales tax law is one of the legislative priorities for the Missouri Chamber Federation, a grassroots coalition of more than 130 local chambers.
“Just because it’s difficult doesn’t mean it shouldn’t be done. It needs to be structured in a way that is easy for the business owner to understand and comply,” said Blue Springs Chamber President Lara Vermillion.
Elsewhere in the state, the sentiment is the same. Scott Tate, president and CEO of the Greater St. Charles County Chamber of Commerce, said St. Charles County is primarily funded by sales tax, so that revenue is especially important.
“I don’t think people fully understand that the taxes they pay in the stores is what funds road construction or what funds the parks or whatever the local municipalities use their monies for. Then when they start to see some of these things being cut, they get frustrated,” said Tate. “Part of it is just, we have to educate people that if they go online, their money is being diverted away from some of those services.”
No one is blaming consumers for price shopping — or companies for not charging sales taxes in states where it isn’t yet required.
“Everybody wants to save a dollar. And you certainly can’t fault anybody for wanting to be frugal with the money that they make,” Tate said.
Still, if no law to close the sales tax loophole gets passed here, the long-term outcome for our small companies could be bleak.
“If we do not support the brick-and-mortar businesses in our communities, they will close their doors. That will leave vacant buildings and people without jobs. It will mean a reduction in services in all the areas funded by business property tax and sales tax,” Vermillion said.
As states race to establish internet sales tax laws in the wake of Wayfair, it’s possible Missouri could pass similar legislation as early as 2019. What form that legislation will ultimately take remains to be seen. But policymakers will be searching for ways to find harmony between online and local retailers.
“It certainly seems like it would be fair with the technology available that an online retailer — even if they’re out of state — should collect sales tax just like we would,” said Meyer.