• 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 Amazon.com 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. Amazon.com 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 Amazon.com to my house. It takes local schools to teach my children to read and thus to become Amazon.com 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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    • It really has nothing to do with the use of local services – it has to do with the reach of a state’s jurisdiction. If you run a business in NJ (my home state) – you are not the agent for collecting sales tax for PA or any another state…..Do we want to subject the small seller on ebay to the same rules as a large retailer? How can a small seller keep track of the sales tax laws of the various states. Some states have sales tax that varies by county and city. An internet sales tax would be a nightmare for sellers.

    • If the State’s do not have a nexus, the Federal government does, and it can tax interstate internet sales and remit proceeds to the states.

      The reason that there has not been a federal internet sales tax was to let internet sales infrastructure get off the ground. Now that it is established, this should be something that is taxed so that local businesses are not put at an unfair disadvantage and states can also capture revenue that was lost to them.

      During this recession, the federal government has passed a lot of money to the states. A federal internet sales tax could be used to fund this, as well as fund state medicaid contributions.

      People who make large purchases–cameras, video, stereo, whatever, on the internet often do so to avoid state sales taxes. Plugging this loophole makes sense.

    • I might add that if the federal government does collect an internet sales tax it could retain a portion of the tax to fund its costs in dealing with identity theft and protection of its own internet infrastructure. It is good to align the revenue of an activity with the costs of government to support that activity.

    • While I admit there is a loop hole which allows Amazon.com and other online retailers a competitive advantage, the issue itself lies in the inability of states to collect use taxes in general. It’s easy to point to amazon.com and demand they spend the money to initiate a program that taxes all sales and remits the tax to the appropriate states. That argument is not silly. It’s not about the tax, because it’s not paid by online retailers, its about the cost to collect and remit it. It is no more unfair for online retailers to get away with it then it is for other retailers who aren’t forced to collect use taxes for other big ticket purchases. The responsibility is on the states to come up with a way to audit and collect the use taxes from their citizens. However, that project would also be remarkably costly and extremely difficult to implement. The easy answer is to force these mega online retailers to collect the tax, but its not the right answer.