eBay Could Be The New Amazon Under Internet Sales-Tax Law

Online auctioneer eBay is leading the fight against a proposed federal law allowing Internet sales taxes, and for very good reason: eBay, which currently collects no sales taxes, could find itself in the position of having to not only collect sales taxes for thousands of jurisdictions but spend a huge amount of effort closely tracking every auction to determine where buyers are located and whether sales tax is required on each item.

The "Main Street Fairness Act" introduced on July 29 would require conventional online retailers—including Amazon, which supports the bill—to collect sales taxes for states that meet the law's requirements (24 states currently do). But exactly how the law would apply to non-traditional retailers like eBay isn't so clear. That means Amazon could find itself no longer appealing a lawsuit in New York, launching a ballot measure in California and fighting "Amazon law" brushfires in other states—while eBay could face an IT nightmare.

The bill introduced last week by Senate majority whip Dick Durbin (D.-Ill.) would allow states that have signed onto the Streamlined Sales and Use Tax Agreement to require sales-tax collection by out-of-state online and mail-order retailers. The law would eliminate the requirement that an out-of-state retailer have "nexus" in the state—a store or an affiliate—before it has to collect sales tax.

That would effectively eliminate the need for the "Amazon laws" already passed by a handful of states, including New York, Illinois and California. It would also mean E-tailers that have affiliate marketing programs, including Amazon and Overstock.com, would no longer have a reason to kill those programs in an effort to dodge the sales-tax bullet.

Amazon, the online retailer that probably has the most to gain from killing those state laws, doesn't think collecting sales tax for 45 states will be a problem. "We already collect sales tax or equivalent to more than half of our business or approximately half of our business across the world," Amazon CFO Thomas Szkutak said in an earnings call on July 26. "We support a federal simplified approach, as we have more than 10 years."

What Szkutak didn't say is that a federal law would effectively end most of Amazon's sales-tax-related legal fights. Those lawsuits involve efforts by states to define Amazon and other E-tailers as local businesses if they have affiliate marketing programs. Those efforts, in turn, stem from a 1992 U.S. Supreme Court decision called Quill v. North Dakota, which set limits on when a state could collect taxes through out-of-state retailers. A federal law would throw out the Quill standards, and with them Amazon's current lawsuits.

Overstock.com, which is also involved in many of the Amazon lawsuits, would get that benefit, too. But Overstock still doesn't like the proposed law. "We don't think it's fair to require companies that have no physical presence in a state to have to collect sales tax," said Overstock President Jonathan Johnson. "We're not using the local services, participating in the community or receiving the benefits of the sales taxes we're required to collect."

Johnson added that sales-tax collection "creates a barrier to entry for new businesses that will be insurmountable. Had we had to figure out how to collect and remit sales taxes in 8,000 to 15,000 jurisdictions, we couldn't have done it and we would have gotten in trouble." He said Overstock implemented a sales-tax system over the past year, and it took IT staff months to get it working right.

But it's eBay that faces the biggest potential complications from Internet sales taxes—and the biggest IT investment.But it's eBay that faces the biggest potential complications from Internet sales taxes—and the biggest IT investment. Right now, eBay doesn't do any state sales-tax collection—it leaves that to individual sellers. And although it runs an auction service in California, where auctioneers are required to collect sales tax, it somehow manages to avoid doing the collection.

The auction site's official position is that it opposes the proposed legislation because it's looking out for small sellers that aren't in a position to handle all the sales-tax complications that a new law would bring.

But it may be eBay, not sellers, that is required to collect sales taxes. In many states, auctioneers are required to collect sales tax. What happens if, for example, Texas decides that even though California doesn't require eBay to collect sales taxes like other auctioneers, Texas does? The line of thought isn't complex: If an online retailer in California has to collect Texas sales tax from Texas customers, just like Texas brick-and-mortar stores do, why shouldn't an online auctioneer have to collect sales tax the way Texas auctioneers do?

The proposed federal law doesn't single out online auctions one way or the other. That means while conventional E-tailers will know exactly what they have to do, eBay may be in for a series of Amazon-like legal battles with states over whether it has to collect sales taxes.

But unlike Amazon, eBay would have to do that sales-tax collection as a third party to each auction. That would require eBay to confirm both the location of each buyer (so it knows what locale's tax rates to apply) and detailed information about each auctioned item (so eBay knows whether the item is taxable and which tax rate applies).

That's all information eBay doesn't currently collect. Although most big online retailers already have systems in place to collect at least some sales taxes, eBay would be starting from scratch—and with less control over what it's collecting sales tax on.

How much of that data collection could be automated isn't clear. Although eBay would probably tell sellers that they are responsible for identifying what category each item belongs to, eBay would still be running the auction—and responsible for the accuracy of the statements. And while eBay already spot-checks auctions for fraud and other problems, that doesn't happen at anything like the scale required for this approach.

Could things get even messier? Sure. What if California decides that the auctions are taking place in California (where eBay is headquartered), so that state wants the right to collect the auction sales tax unless a buyer can prove the item purchased is exempt from California sales tax? The fact that California doesn't currently require eBay to collect sales tax doesn't mean it won't jump in if that tax revenue is available but headed for another state. Then multiple states could be fighting—almost certainly in court—over who eBay should be collecting taxes for.

The "Main Street Fairness Act" doesn't provide any answers there. It's written with conventional retail in mind—which means even if an unconventional retailer is the size of eBay, it's likely to be in trouble.

There's one silver lining if eBay has to collect sales taxes on all auctions, though: Those small businesses that eBay says it's trying to protect really won't have to worry about all the sales-tax complications. That will be eBay's problem to solve.