As an e-commerce platform vendor, we’ve been following the internet sales tax debate, well, practically since it started, and not much has changed since then. States continue to be deprived of – deservedly or not, depending on where you stand – sales tax revenue on products that consumers order from out-of-state vendors. States like Texas, where we’re headquartered, are authorized to collect a “use” tax on anything you buy out of state and have shipped here. That means, yes, you are liable for eighty or so cents of tax on that Whitney Houston Greatest Hits CD you ordered from Amazon last week.
As a practical matter, Texas doesn’t spend any time going after consumers for non-payment of use tax. There’s a form socked away on the State Comptroller’s web site for you to report the items you ordered from out of state and didn’t pay tax on, but consumers largely ignore it. Instead, the Comptroller strictly polices use tax with businesses – if you order a dozen laptops from Amazon and don’t report it as “items you bought for your own use,” you’ll have generous tax and penalties visited upon you during your next friendly audit.
The collection of sales tax on internet (or, really, any mail-order transaction from out of state) purchases has always revolved around one thing in most states: a concept called “nexus.” Nexus means, in simple terms, that if your business has a physical presence of any kind in a state, you are obliged to collect sales tax on behalf of that state. You’re headquartered in Seattle but you’ve got a distribution center in Dallas, then Texas expects you to collect sales tax on the orders you ship to us Texans down here. Sounds simple enough, right?
It gets a little more complicated than that. Many states – Texas included – have labyrinthine tax codes that stipulate different tax rates based on the type of product sold, and endless rate variations based on the city, county, municipality, transportation district, and so on. Multiply that complexity by fifty, and you get some idea of how tough it can be to collect sales tax on everything you ship around the country. And, despite a decade of efforts by groups of state governors to modernize the collection of tax in interstate shipping, we’re no closer to a unified, simplified method of tax collection than we were last century. Instead, states have taken the lead in enforcement, and they have become more aggressive. With an estimated $7 billion in lost tax revenue on the line, it’s hard to blame them.
Amazon’s stand on this is clear: sales tax is “very complicated,” according to Amazon CEO Jeff Bezos. “The right place to fix this is with federal legislation.” Of course, Bezos doesn’t really want any of this fixed, because one of Amazon’s primary selling points is that its prices are automatically anywhere from 5-10% lower than local retailers, simply based on the lack of sales tax. While Amazon offers other discounts and advantages, paying ten bucks less than your local Best Buy on that Lost: The Final Season box set can be a pretty compelling reason to buy it from Amazon. Amazon realizes that their primary battle for many consumer goods is challenging the instant gratification of local retailers. Getting someone to wait a few days means the deal has to be pretty special.
Amazon has escalated the tax collection war by building distribution centers around the country, then jiggering the ownership of those centers in novel ways so it does not appear that they are owned by Amazon itself. This practice got Amazon in tax trouble here in Texas: the company (through a subsidiary) opened a distribution center in Irving (outside of Dallas) and, a few years later, the Texas Comptroller sent them a bill for uncollected sales tax and penalties on the order of $269 million. Amazon responded by closing the distribution center and eliminating hundreds of jobs. Clearly, Bezos is not afraid to play chicken with state tax collectors.
Don’t expect this to be resolved soon. In the current political climate, discussions that include the word “tax” must also invariably have the words “cut” or “eliminate” in them. States will likely continue to fend for themselves for many years to come; a federal solution doesn’t appear to be any closer than it was a decade ago. If you do have any type of business presence in another state – including a temporary one, like a long stay at a tradeshow – contact the tax authorities in that state prior to selling anything there. California, in particular, is very loose in its interpretation of nexus, and you might be surprised that your business trip constituted sufficient nexus to be responsible for tax on things you sold there, even if you have no office in the state.
Online retailers have two choices: If you’re small and operate only in a single state, you may be able to largely ignore the drama and worry solely about taxes in your own locale. Stay up to date with tax laws and ask questions whenever you’re concerned about a potential tax liability. On the other hand, if you have a business presence of any sort (even salespeople) all over the country, you might consider using an e-commerce platform and/or sales tax calculation service that handles all the minutia of districts and rates. These services are often priced on a transaction basis and can cut into your margins, but adding another fifteen or twenty cents to every transaction is a whole lot cheaper than a big tax bill.
While Bezos is right that sales tax is “complicated,” he’s being disingenuous – Amazon is one of the leading technology companies in the world, and they have the capacity to figure out sales tax. Wal-Mart, Apple and thousands of other online retailers that also have brick-and-mortar stores in every state charge local sales tax whenever you order online. Sales tax may be a pain to collect and administer, but Bezos is much more concerned about preserving that competitive edge in pricing than he is about the difficulty of tax collection.
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This morning, Microsoft announced that it is acquiring Skype for the princely sum of $8.5 billion. Skype is undoubtedly the most successful consumer phone and video conferencing provider worldwide, but that’s an awful lot of billions for a company that likely didn’t even break one billion in revenue last year. What’s up with the big money, and why Microsoft?
First, Microsoft is in deal-making mode this year. The Windows-Office goldmine that they’ve sat astride for so many years may be sustainable for many more, but it isn’t likely to provide enough long-term growth to please investors. Office and Windows have precious little purchase in the most rapidly growing technology sector, mobile. Redmond is watching market share being eaten away from below by Google’s free alternatives and from above with Apple’s tablets, phones and laptops.
Even worse, Microsoft no longer seems to be an innovator in a broad sense. Standouts like the XBOX (and the brilliant Kinect) and a pretty slick Windows Phone 7 OS are anomalies in a corporation that has largely stagnated, happy to rest on a massively profitable software and licensing revenue stream.
So, why not look outside? The first big move by Microsoft was the Nokia alliance, announced in February of this year. In that case, both companies desperately needed a sea change in mobile strategy, and Nokia had consistently failed to deliver a high-quality smartphone OS. Putting Windows Phone on Nokia devices made good sense for both companies – Microsoft pushes a fledgling operating system out to a much larger audience, and Nokia acquires a slick smartphone UI and access to a broader range of traditional computing services than they were capable of building in house. As a bonus, a strong third player mixing things up in the iOS-Android arena benefits all of us. Healthy competition accelerates innovation.
The Skype purchase isn’t immediately obvious as a victory for both parties. Skype has a large established user base, but Skype’s technology isn’t anything particularly innovative or special. Apple, Microsoft and many others have delivered reliable, high-quality audio and video communication products at the consumer level, and big vendors like Cisco and Siemens dominate conferencing and “unified communications” at the corporate level.
So, what, exactly, is it that Microsoft is getting out of this deal? First, a brand and a subscriber/user base. Skype is the most recognized consumer brand in the world for this type of communication product, so the value of the brand itself is important to Microsoft (whether Microsoft plans to preserve that brand permanently is unknown at this point). Skype also has over half a billion users worldwide by some counts, so Microsoft gains access to that user base. Who knows exactly what they’ll do with it.
Second, Microsoft will integrate Skype into a number of existing and future platforms. Expect tight integration with Microsoft’s XBOX Live service and Kinect – quick videoconferencing from your living room with any Skype user worldwide will be a strong selling point for having the XBOX dominate your living room technology. Also, Skype will likely be positioned directly against Apple’s FaceTime as the video chat application for Windows Phone smartphones of all stripes.
Where else? Skype could be integrated directly with Bing – remember that all of Google’s services sprang from nothing more than search engine market share, and Microsoft is very serious about stealing search market share from Google any way they can. I wouldn’t be surprised if Microsoft largely abandoned (or at least stopped promoting) the “Office Live” brand and services to consumers and bundled more consumer-friendly free services like Bing and Skype all together under a single consumer brand or package. Microsoft can no longer leverage everything off the Office/Windows brands. They need compelling services (like XBOX Live) that stand on their own.
Of course, implementation and delivery of all this goodness will be the real challenge. eBay was unable to integrate Skype technology (and, perhaps more importantly, Skype culture) into its services or company, so there could be underlying issues that might make the acquisition and integration difficult. And Microsoft is dropping a ton of scratch on this deal, so expectations are going to be very high. If they don’t generate something pretty special out of the acquisition, a lot of investors and analysts are going to be disappointed. If Microsoft cannot innovate its way to solid growth, and it can’t acquire its way there either, expect a lot of doomsaying over the next few years.