Would an Online Sales Tax Help Iowa City Businesses?

Traditional retailers and business advocates in Iowa City favor a federal law they say would level the playing field with online competitors that are unburdened by sales taxes.

"It would help on every front," Iowa City business owner Peter Vanderhoef said of the Marketplace Fairness Act, which would require a sales tax for online purchases.

The Iowa City Area Chamber of Commerce president and chief executive agrees.

"Our local business owners are creative and resilient, but collecting sales tax often presents a competitive disadvantage," Chamber President and CEO Nancy Quellhorst said. "The proposed Marketplace Fairness Act will level the playing field."

The Marketplace Fairness Act would require businesses with more than $1 million in annual Internet or catalog revenue to collect sales tax for online purchases and send them to the state where the buyer resides. A Huffington Post report cites a National Conference of State Legislatures estimate that states collectively lost $23.3 billion in sales tax revenue in 2012 due to online sales.

U.S. Senate could vote on the bill, which has bi-partisan support and the blessing of President Obama, as soon as today.

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Supporters say the bill would help retailers battle a practice called showrooming, when shoppers survey a store's goods and then buy it from an online competitor. Ad Week cites Placed and Gartner research that 60 percent of customers use traditional retailers to examine items they intend to buy online.

Opponents say it would harm small business by making them tax collectors and "put them in a position of having to purchase software to calculate sales taxes, according to the Huffington Post report.

A University of Iowa marketing professor called the bill a mixed bag.

Overall, it should be an equalizer for traditional retailers, but tax collection can be complicated and may require added costs to execute, which could overburden small businesses that are already stretched thin, said Gary Russell, Henry B. Tippie Research Professor of Marketing.

"I think it is probably inevitable in some form, because lack of taxation you could argue does give online firms an unfair advantage," Russell said. "But, if this passes does this solve all the problems that online firms present? No, it doesn't."

Vanderhoef owns Iowa Book, a circa-1920s Iowa City business that like many others has lost customers to online competition. Online sales now accounts for 16 percent (and climbing) of all retail, up from 2 percent in 2000, according to a Federal Reserve Economic Data report.

It's tough to compete when online retailers off the top have a 10 percent price advantage, Vanderhoef said.

"It's enough to shut down businesses, and it is doing that, and there's not much you can do about it," Vanderhoef said. "It has to be something on the national front, so a bill is important. A (congressperson) who would be against doing that is probably being supported by people who do ship stuff."

Catherine Champion, who owns Iowa City boutiques, Catherine's and Cheap and Chic, agreed the law would help brick and mortar stores.

"I completely agree," Champion said. "It definitely gives an upward advantage to businesses created for online only. In addition to no property taxes being billed, it creates an uneven playing field against brick and mortar store." 

Vanderhoef warned that the logistics of how the taxes are returned to the states will be critical to how viable it is for small businesses to comply with the law.

"You have to make it really simple or it's not compliable," Vanderhoef said. "The person collecting taxes would have too difficult a time doing it. And, there has to be some way to enforce it."