Wal-Mart: Tax Hypocrite?

While Amazon and the state of California were doing their political deal for online sales-tax collection, someone apparently pointed out to the state that Wal-Mart—one of the tax's biggest backers—isn't collecting California sales tax for some of the most expensive items on its own E-Commerce site. Wal-Mart's explanation: The items (including boardroom-style projection systems that cost as much as $70,000) aren't really being sold by Wal-Mart, even though Walmart.com is processing the orders and collecting the money.

That sounds just a wee bit hypocritical, especially because Wal-Mart is unquestionably required to collect sales taxes online given that it has both brick-and-mortar stores and an E-Commerce distribution center in California. But the problem—and Wal-Mart's excuse—points out a legitimate issue when it comes to collecting those taxes online. A traditional store's boundaries are pretty straightforward. But online, it can get a lot harder to tell one retailer ends and another begins, and exactly who is supposed to be collecting which taxes.

According to the Los Angeles Times, California's tax agency, the Board of Equalization, has discovered that Walmart.com carries items that—the site says—are "sold and shipped" by Boston-based Wayfair LLC, which doesn't have operations in the state. (Until September 1, Wayfair was known as CSN Stores.) Although Wal-Mart processes the order, it doesn't collect sales tax. According to Wal-Mart, Wayfair didn't ask Wal-Mart to collect the tax, so Wal-Mart doesn't.

Not so fast, said Board of Equalization member Betty Yee. "As a leader in trying to enforce the new [law], they also should be leading the charge in terms of being very clear about the application of the tax on all transactions with California consumers," Yee told the newspaper. And the retailer should be collecting sales taxes, too.

No one has said exactly how the tax bureaucrats suddenly discovered Wal-Mart's non-collection for hundreds of products on its Web site. No doubt it was just due diligence. Or more likely a whisper from the other side of the tax-collection campaign, in which the politics are—not surprisingly—getting increasingly hardball.

There's a real problem here that goes beyond Wal-Mart, though. Sales-tax rules were designed for the physical world, where anyone from a pushcart vendor to a giant department store could be required to get a permit and collect the tax on every sale. Even if one retailer is physically located inside another retailer's store, it's still possible to separate out who each transaction belongs to—and thus who the tax board should be going after.

Online, it's messier.Online, it's messier. When Target, Borders and ToysRUs outsourced their Web sites to Amazon a decade ago, it was easier for state-tax agencies to argue that the traditional retailers, with brick-and-mortar stores in the state, were still responsible for sales taxes. But what if a pure-play E-tailer uses a traditional retailer's online store to sell its goods? Or what if one out-of-state E-tailer sells through another out-of-state E-tailer's Web site—or if just part of the transaction is outsourced? Who exactly does the tax agency go after?

California hasn't helped itself by carving out separate rules as part of the political fight over online tax collection. For example, traditional auctioneers in California are required to collect sales taxes on every sale. But eBay—which is based in California—isn't being required to collect online sales taxes. That's the job of the sellers themselves, according to a deal that was cut to encourage eBay to support tax collection.

In theory, that's because eBay isn't actually the seller—it's just providing a mechanism for the sale, handling the money and taking a cut. There's a usefulness in that logic: For example, it cleanly cuts the whole payment-card chain out of the tax-collection loop, so tax agencies won't go after processors, acquiring banks, card networks and issuers to collect sales taxes.

Then again, what eBay actually does sounds a lot like what traditional auctioneers do. It also sounds pretty much like what Wal-Mart does for third-parties like Wayfair, who are the official sellers of some items on Walmart.com.

And the messiness doesn't stop at California's borders. In a brick-and-mortar store, sales-tax rates depend on the location of the store where the transaction is done. In most states, online sales-tax rates are based on the location the product is delivered to. But in a few, such as Illinois (which just passed its own online sales-tax collection law), the sales-tax rate is based on where the order is actually processed.

As a result (according to the Chicago Tribune), the same item sold to the same customer by different E-tailers could have different sales-tax rates—and it's almost impossible for customers to confirm whether the sales-tax rate charged is correct. (Of course, whoever has the higher sales-tax rate will be blamed as a thief by any customer who notices the difference.)

No matter what finally happens with online sales-tax collection, there are going to be lots of theories about exactly who's on the hook for the taxes. Fortunately, every retailer can count on one thing: The tax collectors will always think it's you.