Internet Sales Tax – Potential Impact on Small e-Tailers

The issue over online retailers collecting sales taxes is heating up across the country. In the past week alone, we’ve seen movement on legislation in Texas, Connecticut and Hawaii. As states contend with budget deficits and look for ways to bring in revenue, more may begin to look toward internet sales taxes as a solution.

Although major online retailers have become the face of this issue, a more silent party is also confronting potential hurdles. In the wake of pending legislation, smaller, entrepreneurial e-tailers who lack clout and lobbying ability can do little more than wait while legislation threatens to fundamentally change the online business model and open the doors for foreign-based online businesses.

While the matter of state nexus and sales taxes may solely be up to Congress as Supreme Court review appears unlikely, small online businesses may have limited options:
  • Start charging sales tax. While some e-tailers have based their model around price advantages without tax, online commerce still maintains the advantage of convenience.  Select small e-tailers may be able to withstand the addition of sales taxes, however, sorting through the policies of thousands of taxing authorities could add additional challenges to their business.
  • Consider your physical touchpoints. It will be important to consider physical touchpoints as this the issue progresses. Look for states that aren’t pursuing legislation as you grow, add affiliates and open new warehouses.
  • Relocate or outsource. If your site is housed in a state pursuing legislation, or you work with an affiliate in a state pursuing legislation, relocation may be an option or in cases like FatWallet, a necessity. Some online businesses may also look to move their sites offshore. Ultimately, if more small e-tailers have to close down shop, it is expected that offshore entrepreneurs will look to fill in the gaps of niche e-tailers. As this issue continues to develop, we may see an influx of foreign-based online businesses breaking into the U.S. e-commerce arena.

Although challenges may be ahead for small e-tailers, some brick-and-mortar retailers argue that this will level the playing field and reduce an unfair advantage that online retailers have had.

What obstacles have you encountered with state nexus?