Amazon's Fight With Illinois Is A Small Part Of A Bigger Global Battle Between Online Retailers And Tax Authorities

A global fight is developing between online retailers, their bricks-and-mortar competitors, and government tax agencies; How this argument plays out will affect investors, business owners, and taxpayers.

Amazon’s cutting off of Colorado affiliates over state sales tax on Internet purchases and the online retailer’s similar threat to Illinois over the same issue is part of a bigger, international battle between Internet retailers and tax authorities.

The attempt to balance public budgets by increasing taxes isn’t confined to the US. The UK government has increased VAT rates from the beginning of the year for the same reason and is facing discontent over increasing tax burdens, particularly on fuel prices.

For the moment the UK government and customs authorities are fairly relaxed about the loss of value added sales tax (VAT) income that has seen some British supermarket chains shipping online orders from their Channel Islands branches. That sanguine view isn’t shared by some of the public who’ve taken to blockading stores owned by alleged tax avoiders or accused of dodging UK taxes.

Meanwhile in Australia, a coalition of some of the country’s biggest shopkeepers have united under the “Fair Go for Retailers” banner is petitioning the Australian government to change tax free levels of imported goods, claiming online shoppers avoiding the local Goods and Services Tax, similar to the British VAT, is affecting their sales.

The somewhat condescending official Australian government response to the lobbying shows the local politicians are more attuned to the public feeling on the matter. That the retailers totally misjudged the sentiment of their customers is something that should worry investors in the Aussie retail sector.

Online retail’s disruption is more than just a problem for a few English speaking countries, the loss of tax income is shared by every state and country that has a sales or value added tax – countries as diverse as New Zealand, Japan, Thailand and all the European Union nations – it’s also more than just a government tax problem.

Just as the move to low-cost manufacturing centres ravaged much of the Western world’s factories, the services sector is now seeing a similar move. While governments can tax physical imports, dealing with services is a far more complex task, it also presents huge changes to businesses and investors.

Until recently relatively lower level jobs such as call centres, transcription services, and support desks that have been offshored but the outsourcers are now moving up the value chain. Last month The Economist described how US law firms are moving high margin but relatively low skilled work offshore to India.

These opportunities to cut costs have moved into the small business and start up sector as well with online bidding sites like, O-desk and 99 Designs offering almost every business support service imaginable, from virtual offices to logo design.

Anyone competing locally against foreign contractors on those sites starts from exactly the same tax disadvantage as the local shoeshop or factory, the labour costs add an even bigger disadvantage.

The Internet is making the world of business smaller and that means our competitors are closer to both our customers and us. To think these changes are just affecting a few slow moving corporations and their tax hungry buddies on Capitol is to miss just how all of our businesses and communities are being changed.

The fight between online retailers, governments, and threatened incumbents is one we all need to watch very closely, our own livelihoods depend upon it.

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