Most smart dot-coms have likely already realized that someday they will be required to collect sales taxes. But based on what Jewelers of America’s legislative counsel said this week, that day may be coming quicker than most expect.

However one feels about an online sales tax—and feel free to argue the pros and cons in the comments—it’s easy to see why revenue-starved governors and legislators of both parties are increasingly embracing it. Politicians don’t like to raise taxes. But this legislation arguably doesn’t invent a new levy; it just regulates one that’s almost never collected. (Yes, you are supposed to list all your online purchases on your income taxes. No, I haven’t spoken to any person who’s ever done this.) The 1992 Supreme Court decision Quill v. North Dakota forbade states from collecting tax from out-of-state companies, and has been used to overturn several state laws. But it specifically left the door open for federal legislation to supersede that decision. And many of the big e-commerce names, particularly Amazon, favor a federal solution, preferring that to having to navigate through a patchwork of state laws.

How will this impact our industry? A report by Forrester Research quoted in NBCnews.com—as well as common sense—suggests higher-ticket items will be most impacted. Paying sales tax on a pack of gum is one thing; an 8 percent surcharge on a $10,000 diamond is real money. The biggest dot-com in our industry, Blue Nile, currently only collects sales tax in its home state of Washington and New York, and appears unenthusiastic about having to gather it anyplace else; the company didn’t respond to JCK’s inquires, but warned in an SEC filing that having to collect sales tax could “significantly decrease [its] future net sales” and hurt its “competitive advantage.” In the past, Blue Nile has cut off local affiliates—which create the “nexus” that allow states to tax—rather than pay local sales taxes. (New York State is considered too big to cut off its affiliates—which is why Blue Nile and many other dot-coms agreed to collect sales tax there.)   

But retailers shouldn’t view this as brick-and-mortar’s big salvation. Speaking from personal experience as a New York State resident, I still buy plenty online, because of the convenience, the selection, and the ability to scan user reviews. (And there are certain stores I just don’t like to go into. I’m looking at you, Best Buy.) Even on price, analysts argue that online sellers will maintain a significant advantage, due to their lower overhead. Most etailers don’t have to pay rent for retail locations, they can buy in bulk, and in the case of some diamond sellers, they don’t even hold inventory.  And so the prices at Blue Nile and other dot-coms will likely remain lower than many jewelers’. They just won’t have that sales tax advantage, which gives them a little extra oomph. I’ve spoken to many retailers who have been willing to match online prices if need be, but they can never equal the dot-coms on sales tax—at least not legally. This takes that advantage away.  

Rob Bates

JCK News Director