On-line Sales Tax Hardball

By :: July 7th, 2009

A long-simmering dispute over whether online retailers must collect sales taxes is boiling over again. Two Web retailing giants, Amazon.com and Overstock.com, are severing relationships with local businesses in states that are trying to force them to collect the levy, angering cash-strapped states and sending bloggers into an on-line frenzy.

There are three things you should know about this squabble. 1. It has nothing whatever to do with ‘taxing the Internet.” 2. You owe the tax anyway. Amazon would make the paperwork easier for its customers by collecting the money at the time of sale, but whether it does so or not, you still have to pay. Not that many of us do, but that is another story. 3. According to one estimate, by 2012 state and local governments will be losing as much as $12 billion annually from uncollected taxes on online sales. There is real money at stake here.

On-line sellers and state and local governments have been battling over these taxes for more than a decade. For years before that, mail order firms were fighting the same fight. And the argument has been drearily predictable. States say e-tailers should have the same obligation to collect sales tax as local brick and mortar stores. Amazon, states insist, already has a huge price advantage over local bookstores. Making it easy for Amazon’s customers to dodge sales tax just adds to its dominance and costs government money it is legitimately owed.

The on-line retailers, by contrast, say that collecting sales taxes is onerous and costly, especially since so many jurisdictions have different rates and exemptions. They also argue that, as a matter of law, they don’t have to gather the money unless they have nexus, or physical presence, in the state that is owed the tax. For years, the two sides have been trying to thrash out a compromise through a group called the Streamlined Sales Tax Board, but to no avail.  

Not surprisingly, the latest flap is occurring when states, strapped for cash in the midst of a deep recession, are scrambling to find revenue. They thought they found a wedge when they discovered Amazon and other online sellers had established associates programs with local business and organizations. Under this arrangement, buyers can link directly to the online sellers through these websites, effectively turning the local firms into affiliates. Voila, said the states, starting with New York. That is nexus. And we want our money.

Amazon sued New York and lost. But in recent weeks, it has been trying a different tack. It has begun to shut down its associates program in states such as Rhode Island and North Carolina to avoid having to collect sales taxes. All of this, though, is just the undercard for what everyone expects will soon be the heavyweight championship bout—in California, of course.

The online sellers are right about the needless confusion created by the myriad of state and local sales tax rules. But I’m not persuaded when an outfit with the technological smarts of Amazon says it can’t figure out how much sales tax a buyer owes. Doing this seems neither hard nor costly.

The states and online sellers should take the hint, stop yapping past each other and sort this out once and for all. Congress, which has been less than helpful over the years, may have a role to play as well. But online sellers have grown up now, and it’s time they play by the same rules as other retailers..