Why is eBay Fighting Amazon Over Sales Tax?

Amazon (NASDAQ:AMZN) and eBay (NASDAQ:EBAY) are going head to head before U.S. lawmakers on the issue of collecting sales taxes with online purchases.

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The two e-commerce giants differ on whether small businesses should be exempt from pending legislation that would require online retailers to collect taxes in states where they have no physical presence.

Amazon supports the proposal, arguing that a federal measure would help in “leveling the playing field” for all retailers.
“Fairness among sellers should be created and maintained,” said Paul Misener, Amazon’s vice president for public policy.

By contrast, eBay says small retailers are already heavily disadvantage in the current marketplace by big players like Wal-Mart (NYSE:WMT), Best Buy (NYSE:BBY), and Target (NYSE:TGT) that have a large base of physical stores as well as large online retail sites. Amazon, too, has a vast network of distribution centers around the world.

“In short, while small business retailers are active online and are adopting technology, they are not winning the race under the status quo,” said Tod Cohen, VP and deputy general counsel of eBay, who added that the “share of online sales being done by retailers with less than $20 million in sales is falling.”

Cohen also noted that smaller online retailers face a disadvantage in tax breaks and favorable shipping rates enjoyed by larger retailers.

Under current practice, online merchants don’t have to collect sales tax on transactions that take place in states where they have no physical presence, prompting traditional retailers to complain that these Internet-base companies have an unfair advantage over brick-and-mortar stores.

Over the summer, lawmakers proposed legislation that would allow states to collect online sales taxes on purchases made by their residents, should they so choose, but the Marketplace Fairness Act seeks to exempt retailers with annual sales below $500,000.

Amazon says its main concern is that, by exempting smaller businesses from having to collect sales tax, states will be forced to forfeit significant amounts of revenue. Misener said nearly 30% of uncollected sales tax is attributable to sellers with annual sales below $150,000.

“In other words, a $150,000 exception would deny the states nearly 30% of the newly-available (yet already owed) revenue, but would exempt from collection 99% of online sellers,” Misener said. “Any higher threshold would deny the states even more revenue and keep the playing field even more un-level.”

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Cohen countered that the “real world effect [of the pending legislation] will be to disadvantage small business retailers, a segment of retailers that is already losing market share under the status quo,” while consumers would “face a new tax cost on goods purchased from small remote retailers” without any of the benefits tied to their presence.