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..  



  1. Anonymous  ::  7:59 pm on July 7th, 2009:

    With the Government Accountability Office last year projecting that states would need to adopt an overall state tax increase of 15.2 percent or a spending cut of 12.9 percent, but both state and local tax policy makers confronting increasing difficulties in both finding politically feasible sources of new revenue,the road out of recession is hard. In addition, states confront the realization that their tax structures are increasingly failing to reflect the 21st century U.S. economy. As the U.S. economy has continued to evolve toward a service and intangible economy, the combination with the recession will dramatically reduce state revenues, since most state sales and use taxes apply only to tangible goods and, absent the federal legislation to address Streamlining, are limited from collecting the aforementioned $12 billion in use taxes as the growth in electronic sales continues to swamp on-street retailers. Perhaps more importantly, with few exceptions, states do not tax services, the fastest growing component of demand, and many items, i.e., CDs, DVDs, etc, which used to be sold in stores as a good and were taxed, are now digitized, downloaded, but generally not taxed. This digitalization of products will only accelerate in the future. The inability to collect taxes on content such as video, which comes into individual households via cable, satellite or telephone, will further accelerate the erosion of state tax revenues.
    The implication for this is higher and higher sales tax rates on shrinking tax bases, which is contrary to one of the most basic tenants of good tax policy, i.e., broad based and a low rate. Taxing goods at a high rate, but not taxing services or Internet-related products and services distorts prices and creates economic distortions throughout the economy, particularly in investments. It will also create major equity issues between sellers and consumers.

  2. Anonymous  ::  9:03 pm on July 7th, 2009:

    This is another reason to do comprehensive tax reform and include this as an issue.
    Austen Gooslbee, are you following these feeds? (Imagine what would happen to both readership and the number of postings if he commented back that he does).

  3. Anonymous  ::  9:15 pm on July 7th, 2009:

    Both the state actions and those of the large retailers with associates all seem quite petty and desparate. But that is due to the fact that the sales and use tax system today has problems. These include:
    – E-commerce makes it easy to have operations in few states and customers in all states. Having a physical presence in few states means states need to rely more in their citizens voluntarily paying their use tax. States have done a poor job of educating citizens about use tax – most people don't know what it is. Why don't states run pop-up ads on the Internet? Why don't they send letters to individuals with income over $100K who left the use tax line on the state income tax form blank asking questions about why it was blank?
    – The sales tax is complicated. The tax base and rates vary from state to state. Even with the Streamlined Sales Tax model law, a state can still have multiple rates within the state. In California, these local rates can easily change during the year as voters enact 1/4 and 1/2 cent tax increases to pay for transportation and other activities. Vendors track all of this by software – but it is expensive and the software only operates with human beings. States should move to having just one rate in their state.
    – Technology doesn't seem to be used to help enough in sales tax collection. Online sales are usually via credit card or paypal? Why not have states add a link to any e-commerce site that enables them to charge the sales tax at the same time. It can be done in various ways that prevents the government from know what you purchased. This technique would prevent customers from having to track use tax purchases and would get funds to the states immediately when the purchase is made.
    I think it is interesting thay many affiliates are asking their legislators not to enact “Amazon” tax laws like New York did in April 2008 because they know Amazon will cancel the agreements and they make money from these arrangements (which do seem like advertising to me, not sales representation). What seems interesting is that some of these affiliates are entities that would benefit if Amazon did volunarily agree to collect the sales tax. These include entities connected with public schools, like PTAs. Why don't they put pressure on Amazon and other vendors that they want them to collect the tax? Why not also put pressure on states to move to one rate per state.
    I'm afraid states are losing time and money trying to pass laws that don't address the entire problem and are too easy for vendors to avoid (such as be canceling associate agreements). Time would be better spent getting to one rate per state, educating citizens about the use tax and looking for technological solutions – after all, this is the 21st century.
    I've written about this topic a few times:

  4. Anonymous  ::  7:12 am on July 9th, 2009:

    Ahh, since the U.S Constitution prohibits taxation on interstate commerce, I fail to see why this is even an issue.

  5. Anonymous  ::  8:33 pm on July 9th, 2009:

    This is the applicable provision:

    No Preference shall be given by any Regulation of Commerce or Revenue to the Ports of one State over those of another: nor shall Vessels bound to, or from, one State, be obliged to enter, clear or pay Duties in another.

    This applies to ships. I can forsee making it apply to trucks, but not to sales taxes. There is a provision about state taxes on imported or exported goods conforming to Congressional guidelines, but this provision does not apply.

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