Some jewelers say online companies should have to collect sales tax just like they do. But that will take legislation—which may not be a sure thing

If you ask retailers like John Henne, they say the Internet sales tax issue is all about fairness.

“We’re not afraid to compete with the Internet,” says the president of Henne Jewelers in Pittsburgh. “But we can’t give customers a 7 percent price advantage.”

Currently, if a customer goes into his store and buys a diamond, he pays 6 percent Pennsylvania sales tax. Yet if a customer stands outside his store and buys a diamond on his phone from an e-tailer, the customer doesn’t pay any. And with an expensive purchase, that can spell the difference between someone who buys and someone who walks. “We see it most often with engagement rings—when things start to get over $10,000 and that means about $1,000 tax,” Henne says. “When someone is young, they want to make every dollar count.”

Georgie Gleim, owner of Gleim the Jeweler in Palo Alto, Calif., has heard similar things from her customers. “They will say, ‘I would really rather buy from you except for the sales tax,’?” she says.

Roll Call/Getty Images
Declaring opposition to the Marketplace Fairness Act, June 16: Grover Norquist (second from r.), president of Americans for Tax Reform; Sen. Rand Paul (far r.); congressmen and businessmen

Yet in reality, consumers do owe taxes for their Internet purchases; they just rarely pay them. According to statistics cited by the Minnesota House of Representatives, only 1.6 ­percent of taxpayers properly pay their “use” taxes (the name for out-of-state sales taxes)—even though they are, technically, legally required to do so.

“People say this is about a new tax,” says David J. Bonaparte, CEO of Jewelers of America, which backs legislation to require online companies to collect sales taxes. “It’s not a new tax. It’s simply upholding a law that is now in place.”

The current situation also doesn’t sit well with some governors, who worry that their states are being deprived of a not-insignificant source of revenue—as much as $21 billion annually, according to statistics. And so, during the past few years, nine states—Arkansas, California, Connecticut, Georgia, Illinois, New York, North Carolina, Pennsylvania, and Rhode Island—have passed laws requiring Internet companies to collect sales tax. (Vermont has legislation that goes into effect when 15 other states ratify similar rules.)

The catch here—and it’s a significant one—is that only those e-tailers with an in-state presence must collect the tax. That’s because of a 1992 Supreme Court decision, Quill Corp. v. North Dakota: It prevents states from collecting tax from out-of-state companies with no local “nexus,” or physical presence.

That applies to things like warehouses and offices, but also to affiliates—generally sites that refer traffic to other’s commission. Because of this, Blue Nile does not allow affiliates in states with Internet sales tax laws—save New York—to do any kind of solicitation. (The company collects sales tax in New York.)

The Quill decision would seem to be the end of the road toward establishing an Internet sales tax, but it was specifically written in a way that it wasn’t. Near its end, it indicates federal legislation can supersede the decision: “Congress is now free to decide whether, when, and to what extent the states may burden interstate mail order concerns with a duty to collect use taxes.”

That’s why Congress has become the battlefield for this issue. For the last few years, supporters of “sales tax fairness” have attempted to pass a national law requiring Internet companies—even those without a local nexus—collect the appropriate taxes from customers.

And until recently, it looked like that legislation might pass. On May 6, the Senate approved the Marketplace Fairness Act by 70-24, a filibuster-proof majority. The next day, White House press secretary Jay Carney indicated that President Obama would sign the bill. Among its supporters: big brick-and-­mortars like Wal-Mart as well as, a little more unexpectedly, e-tail giant Amazon—which has always said it favors a federal solution to the issue.

Bloomberg/Getty Images
House Speaker John Boehner on May 7, saying he likely won’t support the bill because of the burden it would place on small businesses

That momentum, however, has come to a halt in the House, with Speaker John Boehner (R-Ohio) saying he will “probably not” support it. “You’ve got 50 different sales tax codes; it’s a mess out there,” Boehner told Bloomberg ­Television. “[This is] putting in a big burden on some very small businesses.”

Bob Goodlatte (R-Va.), chairman of the House Judiciary Committee, which will take up the bill, has said he has “serious concerns” with the bill that passed the Senate, but remains open to the legislation.

“There is a chance that this will just languish and nothing will ever be done about it,” complains Henne, who participated in a Jewelers of America lobbying trip to convince legislators to support the bill (see sidebar, “JA Brings Jewelers to Washington”). “There is such discord between the Senate and the House, between Republicans and Democrats, that unless something is a really hot issue, they will sit on it almost to spite each other. Which is a shame, because in the Senate, the Marketplace Fairness Act was a bipartisan bill.”

“It’s facing more scrutiny in the House,” admits Chris Fetzer, vice president for Haake & Associates, JA’s legislative counsel. “But we are actively engaging and talking to members about their concerns.”

Fetzer says one sticking point is the bill’s current “small seller exemption,” which exempts companies that do less than $1 million in out-of-state business annually from having to collect sales tax. EBay and other bill opponents have called for that number to be raised to $10 million.

Still, Fetzer notes that the House legislation has bipartisan support and it’s possible that it might be added to a broader bill. 

Of course, while many brick-and-mortar jewelers cheer the imposition of an online sales tax, those who sell online are less enthusiastic.

“It is complicated enough running your books for a single state,” says Oded Edelman, CEO of James Allen, which is generally considered the No. 2 pure-play jewelry e-tailer. “Technically speaking, if the law passes, there may be a scenario where your company is audited by 50 states and any business that is audited so heavily would have to close down just based on the accounting expenses alone.”

Anne Timmons-Harris, a New Orleans–based jeweler who sells online at beadbear.com, worries that having to collect online sales tax will kill fledgling operations like hers.

“This is really an attempt by large business to make it more difficult for small businesses,” she says.

And despite the small seller exemption, Timmons-Harris worries this will just hamper her ability to grow.

“Small businesses create jobs,” she says. “If I can grow my business to where I can hire more people that would be a good thing. This is quashing my ability to do that.”

Meanwhile, online companies warn that their brick-and-mortar competitors shouldn’t see this as a panacea—arguing that, even if the legislation does pass, e-tailers retain certain advantages.

“I don’t think an Internet sales tax will affect our growth,” says Edelman of James Allen. “We are still 20 to 30 percent cheaper than most brick-and-mortars. An additional 7 to 8 percent is not enough to turn away those people who intend to buy online.”

Blue Nile CFO David Binder said much the same on a March conference call: “Our business has a fundamentally lower cost structure.… That price advantage that we have with our customers is regardless of sales tax.”

Even so, Blue Nile’s financial filings imply that imposing a tax could cost the company sales. “Given that we sell high value items, tax is a significant consideration,” said one 10-K filed with the Securities and Exchange Commission. Having to collect it could “discourage customers from purchasing products from us [and] decrease our competitive advantage,” it added.

At this point, with the legislation seemingly stalled, it doesn’t look like Blue Nile will have to worry about that in the immediate future. Even so, as the Internet and e-commerce become a bigger part of our everyday life, the bill’s supporters believe the tide already has turned in their favor.

“We still contend,” says Fetzer, “especially after the very strong vote in the Senate, that this remains a matter of not if, but when.”