If Congress fails to enact destination-based taxation, Chinese sellers will retain a competitive advantage over American producers and sellers. E-commerce presents this apparent dichotomy between domestic e-commerce sellers who must report online sales of over $600 yearly to the IRS and Chinese e-commerce sellers who don’t receive the requisite 1099-K to report their income. International tax complexity deters the expansion of this regulation to foreign companies, including Chinese sellers. But the US shouldn’t shy away from protecting Americans from unfair trade practices, especially those of our own making.
“Fulfillment By Amazon” mechanisms are now common in the e-commerce market. By providing warehousing and delivery services, Amazon.com Inc. and other companies built these mechanisms to reduce risk for Chinese sellers and others. Amazon has gone way further on behalf of Chinese e-sellers.
Eliminating traditional supply chain intermediaries reduces costs for all sellers, but the additional consequence eliminates legal and financial safeguards for American consumers. A customer’s rights from buying American are not duplicated when buying from Chinese e-sellers. Amazon’s contractual terms often allow a seemingly American seller to tell a dissatisfied user that their return must be made directly to China.
As a result, counterfeit and unsafe products regularly end up in the US market. Consumers end up with improper products and poorly assess the domestic sellers’ brands of the faked good. The brand damage occurs even if the customer blames themselves for being hoodwinked by a misspelled word or grammatical error.
I once bought a faked brick set on Amazon in a grouping of Lego-based searches. After receiving the item, I determined the return consequences were too onerous to pursue. But without viable recourse, e-commerce at large suffers a consumer reputation drag that applies to American e-sellers as well.
By the time the market terminates an e-seller’s illegal activities, the Chinese seller walks away with significant profits and only a fraction of lost income from suspended income in transit. At the same time, Chinese e-sellers pay far less in income taxes because the Chinese Communist Party has prioritized exporting sales to the US. China’s economy cannot yet support reliance on their own domestic consumption. China ignores, defers, or acquits smaller Chinese e-sellers from their tax obligations. If tax laws are never enforced, they effectively do not exist.
The US has a vested interest and obligation to hold Chinese companies accountable like we hold our own companies. In the realm of tax, the US should demand that Chinese e-sellers selling to US customers receive a 1099 form from e-commerce markets tied to an American taxpayer identification number (TIN). The Chinese e-seller should report to the IRS with assessed taxes. The American TIN is crucial because other factors beyond tax compliance can influence the CCP social ID number.
But what happens when a Chinese seller only interacts with an e-commerce marketplace? How do you tax a company that actively avoids being taxable by staying overseas?
Congress must establish a rebuttable presumption that a Chinese e-seller made a profit in the US from the sale to an American consumer. The US would determine that a Chinese seller makes 40% profit on every sale and assess a standard 21% corporate tax on that profit. Like sales taxes, it would be the responsibility of third-party e-commerce marketplaces to collect and remit the tax to the IRS. The US government can enforce compliance that relies on American-controlled payments systems, credit cards, and other financial institutions. The compliance cost would be lines of code rather than a complete revamp of an entire system. These costs might be noticeable, but they wouldn’t be overly burdensome.
Direct sale companies with an established physical presence would be exempt because their taxes are already considered. E-commerce Chinese companies without a physical presence can engage with the IRS to rebut the presumed liability.
Assume a $100 sale on Walmart.com by a Chinese company to a US customer would have an assumed $40 profit, which would then have a presumed tax of $8.40. Walmart online would collect and remit the tax to the IRS. The Chinese seller can submit a claim to the IRS for a yearly refund. Or it could establish a US physical establishment tax presence (and potential liability) to collect the funds from the third-party e-commerce marketplace and pay the tax due at the end of the year, like an American taxpayer.
E-commerce presents a fantastic way for consumers to get products to their homes when no physical storefront is available. However, Main Street businesses and even domestic e-sellers are the lifeblood of our country, and we have not fairly protected them.
The US went overboard to streamline free trade, but the CCP hasn’t reciprocated. It’s time for the US to protect domestic e-sellers who find their goods imitated, their prices undercut, and their customers confused by bad actors. This e-tax would be a reputational cost of doing business with years of protection failures.
This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
David Morse is tax policy director at the Coalition for a Prosperous America Education Fund. Follow him on Twitter @CentristinIdaho.
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