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Online Sales Tax Collection Gains Steam

March 21, 2011

With states scrambling to find ways to generate revenue, tax-free online shopping is becoming a target increasingly being focused in the crosshairs, reports the Associated Press (AP).

Billions of dollars annually are bypassing the reach of state taxing agencies after the 1992 Supreme Court ruling prohibiting a state from forcing businesses to collect sales taxes when the store has no physical site located in that state.

The exact amount of uncollected taxes from online sales is unknown but a 2009 study from the University of Tennessee estimated that it might total $10.14 billion this year, assuming total e-commerce sales of $3.49 trillion. Most sales however are from one business to another and would not be subject to the same taxes as consumer purchases are.

The 1992 Supreme Court ruling, until recently, has meant that Wal-Mart, based in Arkansas, would collect taxes from shoppers in all states with sales taxes, whether those shoppers buy items online or at physical stores, due to it having locations nationwide.

But Washington based Amazon, would not collect taxes from Floridians, for example, as it has no physical presence there. Although in such cases, consumers in Florida are supposed to pay the tax directly to their state, few actually do.

Some states argue that a retailer has a physical presence with the use of affiliates that refer customers to the retailer’s website and collect a commission on sales. These affiliates range from one-person blogs promoting the latest gadgets to companies that run coupon sites.

This month, Illinois passed a law requiring internet companies with affiliates in that state to collect taxes on sales to Illinois customers. In Vermont and Arkansas, similar bills passed recently. Similar laws have recently been legislated in New York, North Carolina and Rhode Island.

Arizona, Massachusetts and California are considering passing similar sales tax collection legislation. California lawmakers had passed a bill in 2009, however the governor vetoed it.

Brick-and-mortar retailers, have long-complained to legislators for not collecting sales taxes and point out the unfair position it places them in.

David Vite, head of the Illinois Retail Merchants Association, told AP, “The choice of the merchant by the customer should not be based on tax policy. It should be based on service, convenience, on the shopping experience and, of course, price “” but not price based on tax policy.”

Online retail giants Amazon and Overstock.com disagree with the states’ actions, and are planning their own response.

Illinois-based FatWallet, which runs a coupon website is planning to move to another state, most likely neighboring Wisconsin, founder Tim Storm explained.

Storm estimates the new law might cost FatWallet between $4 million to $5 million in revenue this year if it stays in Illinois. The company has received notices from Amazon, Overstock, electronics site Newegg and musical instrument retailer Musician’s Friend on their plans to end affiliate programs in Illinois.

Wal-Mart and Barnes & Noble are supporting a Washington DC-based group called the Alliance for Main Street Fairness, which favors changing of tax laws in various states so that online retailers would have to collect sales taxes.

Amazon’s vice president of public policy, Paul Misener, tells AP that Amazon isn’t against the principle of collecting sales taxes but would prefer “a constitutionally permissible system that is applied evenhandedly.”

Amazon collects sales taxes in North Dakota, Kansas, Kentucky, and its home state of Washington. The online retail giant collects in New York also as it fights the Empire state over a 2008 law that was the first to consider local affiliates available to require sales tax collection.

The state of Texas is also at loggerheads with Amazon. Texas claims Amazon owes it $269 million in uncollected online sales taxes because of a distribution center that Amazon built near Dallas recently. Amazon is planning to close that distribution hub in April and nixed expansion plans elsewhere in Texas over the dispute.

Congress might be in the mood, with so many states crying over budget shortcomings, to give states authority to require tax collection by out-of-state retailers. Michael Mazerov, a senior fellow with the Center on Budget and Policy Priorities, believes a federal law would be ideal to ensure that states get their taxes, but he understands why such congressional efforts have stalled.

“It’s tough legislation politically because you’re asking Congress to pass legislation where they will be unfairly and inaccurately criticized as imposing a new tax,” Mazerov told AP.

In the meantime, sales tax bills will continue to blossom to the cheers of some, and jeers of others as online shopping continues to prove more and more popular.

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