The “Amazon Law”: Sales Tax on Internet Purchases

Most individuals who shop online avoid sales tax. They are frequently breaking the law, but the law is unenforceable. Technically, sales tax is legally due on internet purchases if the item is taxable in a local store. One is supposed to remit the sales tax on internet purchases. States can’t easily enforce this requirement so most people don’t bother.

Now states have another way to collect sales tax on internet purchases. In the last several years two states, New York and Rhode Island, enacted laws that require internet retailers to collect state sales tax on purchases made to customers in those states. Such laws have, so far, been upheld in court even though the Supreme Court has ruled that sales tax collection is only required by retailers with in-state property, employees, or independent sales representatives.

Does or other online retailers meet these requirements? Yes, but only because two other Supreme Court decisions have ruled that an out-of-state seller has an in-state presence if it uses third parties to “establish or maintain a market.” All those in-state businesses that earn revenue when individuals click on website links to online retailers count as in-state presence for that online retailer. Those in-state businesses are considered representatives of the online retailer and help that retailer establish or expand its market. has lots of such arrangements, no doubt in every state.

Is it unfair for online retailers to collect and remit state sales tax? An argument they have made or will try to make is that they do not use local services so should not have to pay for them. That’s a silly argument. Local services are used by the individuals in the state who receive and enjoy the goods sold online. It takes roads and bridges to get books from to my house. It takes local schools to teach my children to read and thus to become customers, and so forth. Anyway, the online retailer doesn’t  pay the tax. I do. It just collects it, like any other in-state retailer.

I agree with the sentiments expressed by Michael Mazerov in the July 23, 2009 Center on Budget and Policy Priorities report on this topic, from which I learned all of the information in this post. Mazerov is unambiguous in his support for a level playing field with respect to all state sales tax: that every retailer should collect and pay them in proportion to state sales, independent of the physical location of the point of sale. Until Congress acts to make this national law, states can collect some of the sales tax they would otherwise lose using the broader definition of in-state presence described above. That’s a start.

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