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Creative Kidstuff president and CEO Roberta Bonoff in her new St. Louis Park store.

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Nov. 27, 2011: The debate over online sales taxes heats up

  • Article by: JIM SPENCER
  • Star Tribune
  • April 12, 2012 - 10:01 PM

WASHINGTON - Roberta Bonoff is having a difficult time closing sales online, as her specialty toy business suffers from high "cart abandonment." That's what happens when someone goes to a website to make a purchase, puts an item in a virtual shopping cart, but never proceeds to the virtual checkout line.

Bonoff runs Minneapolis-based Creative Kidstuff, which has seven stores in the Twin Cities area and one in West Des Moines, Iowa, as well as its online business. Shoppers regularly visit Creative Kidstuff's Internet site to browse, Bonoff says. But, too often, they go elsewhere to buy, drawn by the lower prices of online sellers who don't collect sales taxes.

"It's just hard to compete when you have to pay taxes [and others don't]," Bonoff said. "It puts products out at a different price point. People find the stuff on my site and buy it on Amazon.com."

Bonoff isn't opposed to paying the company's sales taxes. She just wants other online retailers to do the same.

A 1992 Supreme Court decision allows many online sellers to forego the collection of sales taxes while companies with storefronts are forced to pay. But as the volume of online-only purchases -- or e-commerce -- surges by the billions of dollars, questions have emerged about competitive fairness and whether online companies aren't paying their fair share of taxes at a time when local and state governments are financially stressed.

"This is an issue of tax policy that's been on the back burner for more than 20 years," said University of Minnesota law professor Fred Morrison. "But it's an issue that's getting more attention."

The issue resonates, in particular, during the holiday shopping season, when many retailers earn more than half of their sales for the year. Online shoppers are expected to spend $37.6 billion in November and December, an increase of 15 percent over 2010, according to sales rating company ComScore.

"The quantity of sales has multiplied manyfold because of the Internet," Morrison said. "Back in 1992, it was mostly paper catalogs."

Four bills now in play in the U.S. Senate and House of Representatives would give states the right to require online merchants to collect sales taxes above certain thresholds. The state of Minnesota estimates that it could have collected $394 million in 2010 from online sellers who aren't physically located in the state.

Minnesota's largest retailers, Target and Best Buy, support the bills in Congress, as they collect sales taxes for their online sales. "Target believes existing sales tax laws create an unfair pricing advantage," company spokesman Lee Henderson said in a statement. Best Buy and Target declined interview requests.

Sales tax reform has become the "No. 1 issue" for the Minnesota Retail Association, which represents 2,000 businesses ranging from giant corporations to mom-and-pop storefronts.

"Brick-and-mortar retailers have become a show box for online sales," said Brian Steinhoff, the retail association's director. "People come in and touch and feel the product, then go online and buy it."

His members aren't seeking tax relief, Steinhoff emphasized. Instead, they want a level playing field, where everyone selling to people in Minnesota would pay sales taxes.

For that to happen, Congress must pass new legislation that trumps the 1992 Supreme Court decision. The court ruled that to be liable for state sales taxes, a retailer must have a physical presence in the state. Online-only sellers do not. People with storefronts as well as a Web presence do.

Online sellers who don't pay sales taxes enjoy a growing advantage in pricing, Minnesota law school's Morrison added. Sales tax rates have risen over the past two decades. So what was once a 4 or 5 percent discount has now risen to 9 or 10 percent.

Still, proponents for collecting online sales taxes face powerful opposition. Some antitax advocates will reject the new online sales tax bills on principle. Powerful corporate interests operate on both sides of the debate. Saying it can offer "customers the best price with or without sales tax," Amazon.com has joined Target and Best Buy in support of at least one of the bills in Congress.

But other huge Internet sales facilitators, especially eBay, continue to push back against legislation they call harmful to small businesses. Critics questions the online sales thresholds that would make sellers have to collect sales taxes. The bills under consideration would exempt online-only companies with sales of less than $500,000 to $1 million a year. Many Web sales facilitators say online-only companies shouldn't have to collect sales taxes until they have several million dollars in annual sales.

"This is another Internet sales tax bill that fails to protect small business retailers using the Internet and will unbalance the playing field between giant retailers and small business competitors," Tod Cohen, eBay's vice president for government relations, said in a statement about a Senate bill offered by Lamar Alexander, R-Tenn., and Dick Durbin, D-Ill.

Even as that bill and three others await consideration, a proposed bipartisan Senate resolution would ask Congress not to change the online sales tax collection rules. Minnesota Sens. Amy Klobuchar and Al Franken have yet to take positions on the online sales tax reform bills or the resolution opposing them.

In the House, only St. Paul Rep. Betty McCollum among the Minnesota delegation has taken a public stand. She signed on as a co-sponsor of a bipartisan bill that would give states the power to collect sales taxes from online-only merchants.

"I worked in retail for 25 years at a time when all businesses had a level playing field," said McCollum. "Today, Minnesota businesses and retailers are at a serious disadvantage when their online competitors don't have to collect sales tax. ... A sale is a sale whether it's made on Main Street or online."

At Creative Kidstuff, Bonoff noted that paying taxes is always a cost of doing business.

"If you have a business model that doesn't allow for that," she said, "then maybe you don't have a good business model."

Jim Spencer • 202-408-2752

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