The honeymoon had to end. For years online retailers have had a strategic advantage over brick and mortar stores by avoiding state income taxes on sales. My partner, Michael Wagner, CPA®, has the inside story on why that’s about to change.
Stewart: Michael, explain to our readers how the Alabama sales taxes has worked for online retailers in the past and what changes are on the horizon.
Michael: Since their inception, online retailers who do not have a brick and mortar store in Alabama have not had to pay state or local taxes. There have been several attempts to revise the tax code so that online-only retailers are given the same treatment as traditional retailers. Online-only retailers have argued they remain exempt from state and local sales tax because they did not have a physical presence in the state. In addition, the more than 700 different tax jurisdictions in the state were too numerous and cumbersome for online retailers to easily comply with a tax payment system. The solution the state came up with was the Alabama Simplified Seller Use Tax Remittance Act. The Act was enacted in October of 2015 and its main goal was to capture online-only tax revenue that has historically gone uncollected. This program allows the eligible sellers to collect, report and remit a flat, fixed rate seller use tax of 8%. Initially, only a handful of online-only retailers voluntarily elected to participate. There are now close to 50 online-only retailers participating and last month, Amazon, America’s largest online retailer, announced they would comply with the Act effective November 1, 2016. After that date, all Amazon purchases shipped to an Alabama address will be charged an 8% sellers use tax. The tax will be split 50% to the state, 25% to the cities and 25% to the counties.
Stewart: Who are the winners?
Michael: the winners include:
- State of Alabama – This is the obvious winner with a massive budget shortfall, this new revenue stream comes at a time of real need. The state estimates the tax could bring in $40-$50 million in 2017. The expectation is that this will continue to increase as online purchases continue to increase.
- Cities and counties – Like the state of Alabama, local cities and counties also benefit as they will share the other 50% (based upon population). Local officials will be able to fund pet projects that they have put on the back burner for years.
- Brick and mortar retailers – This is a big win for traditional retailers as they feel this will help level the playing field and allow them to compete with online only retailers. For some consumers, saving 8-10% on purchases meant that they would avoid a brick and mortar store and opt to go to Amazon instead. Big box retailers like Wal-Mart, Target and Best Buy have lobbied for years to for online-only retailers to charges sales tax like they are required to do.
- Amazon – By voluntarily opting into the Act, Amazon (and other retailers that have already complied) locks in the 8% flat rate ahead of any state or federal laws that could impose higher tax rates or a more complex tax filing structure.
Stewart: If you have winners, you’re bound to have losers.
Michael: Yes, losers include:
- Loyal Amazon Customers who will see their costs rise 8%.
- Amazon and other online-only retailers who will have to collect, report and remit the tax causing their internal costs to rise.
Stewart: Here’s a tip: If you’re an Amazon shopper and want to save 8%, do your holiday season shopping before Halloween!