Proposed fee on internet sales could help save West Virginia stores

A bill that would assess an impact fee on internet sales was introduced in the West Virginia Legislature on March 16, 2021. If enacted as written, the 2% tax would raise revenue for a new Storefront Business Preservation Fund to support in-state retailers. Yet, it could also negatively impact West Virginia businesses that make online or phone sales for delivery in the state.

House Bill 3213 points out that sales tax has historically been collected at the point of sale “where a storefront business has physical facilities … [and] where inventory is stored and employees operating the business provide direct in-person point-of-sale transactions.” Yet during the past decades, and especially last year, many retail sales shifted online.

According to the bill, internet sellers generally “contribute less to the state and local community’s property, employee and use taxes.” They tend to have “fewer employees and less expenses” than traditional (i.e., physical) stores. They often charge lower prices than their brick-and-mortar competitors. As a result, “small businesses in the communities of this state have suffered.”

Put another way, the rise of ecommerce has contributed to the downfall of traditional sellers in West Virginia. 

The authors of the bill acknowledge that “government should not attempt to pick winners and losers in our economic system.” However, they find the preservation of storefront businesses to be “of critical importance” to the communities they serve.

In addition to providing goods and services, brick-and-mortar stores employ the people of West Virginia and contribute to the local tax base. The bill states: “The quality of life for our citizens is severely impacted by these stuttered businesses and commercial areas.” It is, therefore, a “vital government function” to attempt to preserve them.

The 2% impact fee would apply to “each internet transaction,” defined as “any retail purchase initiated using internet or telephone that is delivered to the purchaser’s residence, place of business or a location other than the premises of the sales location by delivery of the U.S. Post Office or by a mail or package delivery service.” Online sales originating in the state as well as those from other states that are subject to West Virginia sales tax would be subject to the fee. The fee wouldn’t apply to sellers not obligated to collect sales tax.

All proceeds from the fee would go toward the yet-to-be-established Storefront Business Preservation Fund, to be administered by the West Virginia Development Office. If the bill becomes law, collected monies will fund the preservation, protection, and enhancement of retail storefronts throughout the state, as well as downtown retail businesses adversely impacted by internet sales. It could also help create jobs at physical retail spaces, which in turn would generate state and local tax revenue and “preserve our traditional culture and institutions.”

Many internet sellers have been collecting sales tax on West Virginia transactions since January 1, 2019, when the state began enforcing economic nexus. West Virginia and other states won the authority to impose a sales tax collection obligation on businesses with no physical presence in the state when the Supreme Court of the United States ruled in favor of the state in South Dakota v. Wayfair, Inc.

States hoped taxing internet sales would level the playing field between in-state retailers, who must collect sales tax, and their non-collecting out-of-state competitors. “State and local governments long argued Main Street merchants were harmed by sellers not collecting sales tax,” notes Scott Peterson, vice president of government relations at Avalara. “Perhaps they were correct, and the negative impact lasted too long for some Main Street merchants.” 

The coronavirus pandemic has exacerbated any lingering inequalities between brick-and-mortar and online stores. Digital Commerce 360 estimates online sales in the United States grew by 44% in 2020, “the highest annual U.S. ecommerce growth in at least two decades.” It came close to tripling the year-over-year growth of 2019.

In fact, all retail growth last year came from ecommerce. “This means sales through all other channels —stores, catalogs and call centers ­— declined.” In West Virginia, COVID-19 was the proverbial straw that broke the camel’s back for some struggling retailers.

West Virginia’s proposed fee on internet sales will likely fail. Although it treats in-state online sales the same as out-of-state online sales, it treats businesses with different sales models differently. In fact, it could be challenged by some of the very businesses it strives to protect and support: West Virginia retailers that developed an online sales channel to counter declining in-person sales.

The fee could also negatively impact ecommerce-only businesses with a physical presence in the Mountain State, and they employ West Virginians and contribute to the tax base like their brick-and-mortar counterparts. However, in-state businesses could sidestep the fee by having consumers buy online, pick up in store; the fee applies only when a purchaser receives the delivery “at a location other than the point of origin of the sale that is within this state.”

In short, there’s a lot for legislators to work out. In the meantime, learn more about what states are doing to minimize fallout from the pandemic in our COVID-19 tax relief roundup.