Click for full photo gallery: 10 States Aiming To Tax Internet Sales
Americans will spend $37.6 billion buying on-line this holiday season, shelling out $1.2 billion on this coming �Cyber Monday� alone, ComScore Inc. predicts. And on a sizable chunk of those purchases, no state or local sales taxes will be paid.
But some Internet buyers could find this is their last Christmas shopping untaxed. Most notably, by this time next year, Amazon.com, the Web�s biggest retailer, will almost certainly be collecting sales taxes on purchases shipped to the 37 million plus residents of California. Currently, Amazon only collects taxes on items shipped to Kansas, Kentucky, New York, North Dakota and Washington. But as part of adeal it struck with California legislators this past September, it has to start collecting from Golden State residents, too, in September 2012.
Residents of other states could see a change by Christmas 2012 or 2013, depending on what happens in their own state legislatures and in Washington, D.C. Earlier this month, an unusual bipartisan group of five Republican and five Democratic Senators introduced the Marketplace Fairness Act, a bill which would authorize the 45 states with sales taxes to require Internet merchants doing more than $500,000 a year in sales to collect their taxes for them, so long as the states simplified their sales tax systems.
�I�ve been around long enough and I�ve watched Congress enough to say this is going to happen,�� Sen. Lamar Alexander, (R-TN), one of the sponsors, predicted in a speech on the Senate floor. He and Sen. Mike Enzi (R-WY), the other prime Republican mover on the bill, are promoting the legislation to their anti-tax colleagues as a matter of states� rights and fairness�not a new tax.
Here, a little background is in order. In 1992, the U.S. Supreme Court ruled in Quill v. North Dakota, that only sellers with a physical presence in a state (�nexus� in taxspeak) can be required to collect that state�s sales taxes. But in finding the Constitution�s commerce clause prevented states, on their own, from requiring collection of their taxes by remote sellers (in Quill�s case a catalog operation), the Supreme Court also observed that Congress, with its power to regulate interstate commerce, could decide to allow such collection.
In the early days of E-commerce, some big bricks and mortar retailers, including Barnes & Noble, and Wal-Mart, tried to exploit Quill and avoid collecting taxes online by setting up separate corporate entities to sell on the Internet. But after enduring state tax audits and lawsuits�and recognizing the advantage of integrating their online and in-store operations�the big retail chains all started collecting Internet sales taxes on shipments to states where they also have stores.
Note that even if an Internet retailer doesn�t collect the tax, residents of most states still owe �use� (meaning sales) tax on their online purchases. States have tried to prod their residents to voluntarily pay up by putting lines on state income tax forms requesting the uncollected sales tax. But few consumers comply and those who wish to avoid sales taxes on line still have plenty of shopping options, in addition to Amazon. Among merchants on Internet Retailer�s list of the biggest 50 on-line retailers, for example, Overstock.com collects sales taxes only on items bound for its home state of Utah; HSN.com only on orders shipped to California and Florida; NewEgg.com only on purchases sent to California, New Jersey and Tennessee; and the Gilt Group only on shipments to New York, Kentucky, and Nevada.
Now, with E-commerce taking an ever larger share of retail sales, traditional bricks and mortar retailers and the states�estimated to be losing anywhere from $11 billion to $23 billion a year from untaxed Web retail sales� have ramped up their fight to make Internet merchants tow the tax collection line. �It�s now the top priority for the entire retail industry,�� says Jason Brewer, a vice president of the Retail Industry Leaders Association, whose board includes executives of Wal-Mart, Best Buy, Target, J.C. Penny and Home Depot. Even the nation�s largest shopping center operator, Simon Property Group, has gotten into the act, filing suit this month against the state of Indiana in attempt to force Indiana to require sales tax collection by Amazon.
As for the states, spurred on by traditional retailers and their own budget woes, they aren�t all waiting for Congress to act. So far this year, Illinois, California, Connecticut, Arkansas and Vermont have passed laws asserting that an Internet seller has �nexus� and must collect their taxes if it gets sales through marketing affiliates based in their states. (These so-called �Amazon laws� are modeled on a statute New York passed in 2008. Amazon has challenged that law in court� so far unsuccessfully.) Texas, meanwhile, is pursuing Amazon for $269 million in back sales tax it say the Internet giant should have collected from 2005 through 2009 because it was operating a warehouse in the state. (Amazon is fighting the bill.)
Particularly galling to store merchants, Brewer says, are new smart phone apps which allow a shopper to look at an item in a store, scan the bar code into his or her iPhone, find it cheaper on the Web and then purchase it on-line�all while still standing in the store. He says stores are often willing to match an online price, just as they�ll match the price from a competing store if a consumer brings in a newspaper advertisement. But store merchants can�t match the fact that the online item comes without sales tax, Brewer complains.
So would forcing them to collect sales taxes slow the growth of online retailers, as the big store lobby hopes? ComScore analyst Andrew Lipsman answers that it �may have a dampening effect because it removes one of the most important cost advantages for online retailers.�� But, he adds, �online retailers still have less overhead than brick-and-mortar, so they can usually maintain better prices even with sales tax factored in.�
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