Collecting sales tax on Internet purchases

Tax revenues are down in nearly every state. Most states rely on sales taxes for a significant portion of their revenues. Purchases made over the Internet are generally exempt from sales taxes. You do the math.

In recent weeks, legislators in Maryland and Connecticut held hearings on whether to force Internet stores to collect local sales taxes. Last month, Colorado’s $1.3 billion deficit led legislators to pass a law requiring e-commerce sites to tax. New York, North Carolina, Rhode Island and others states took or tried to take action last year.

Texas is looking at a two-year budget shortfall of as much as $15 billion. Speaking recently in Austin, Texas Comptroller Susan Combs said the state is losing almost $600 million a year in state and local sales taxes from online purchases.

Over the next decade, online shopping is forecast to grow five times as fast as brick-and-mortar retail, according to a Goldman Sachs research report. It predicts online shopping will go from 4.4 percent of all U.S. retail sales today to 14.6 percent by 2020.

These trends “should create a more favorable climate for leveling the playing field and, in fact, efforts to move forward with legislation have intensified over the past year,” said Wayne Zakrzewski, associate general counsel at J.C. Penney Co.

As I recall, the justification at the time for not imposing sales taxes on Internet purchases was that e-commerce was a new and fragile thing and it needed a little help to ensure that it would survive and hopefully thrive. Mission accomplished, I daresay. I have to say, I can’t see why buying a CD at Cactus Music is subject to sales tax but buying the same CD on is not. In the 1990s it sort of made sense, but not now. says it shouldn’t have to collect sales taxes from customers in states where it doesn’t have a physical presence, the long-standing criterion for catalog and Internet sellers from a 1992 U.S. Supreme Court decision. It’s been collecting local sales taxes in New York since 2008 while it uses that defense in its court battle.

In Texas, has operated a distribution center in Irving since 2006 without collecting sales taxes from its Texas customers. says a subsidiary owns the distribution center, which exempts it from the Texas law.

This is just silly. The fact that such a ridiculous loophole exists is by itself sufficient reason to put aside the pretense that there’s something special about buying stuff over the Internet and start treating it like any other act of commerce. We’ve known for a long time that Texas’ sales tax system is largely outdated because it is mostly focused on sales of goods and not services, which as a share of the economy is now larger and growing faster than goods. That’s one reason why there is now some lip service about reviewing the tax code so that obsolete deductions and exemptions might be reviewed and removed. (There was similar talk a few years back about doing the same for property taxes, but that ultimately went nowhere.) Segregating the economy like this makes no sense.

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2 Responses to Collecting sales tax on Internet purchases

  1. Linkmeister says:

    I think the e-tailers’ primary objection is logistical; keeping track of fifty separate state tax liabilities is an accounting headache. Once you’ve actually figured out how to do it cutting the checks each month is simple; it’s calculating the tax depending on the buyer’s location and then storing the info until the end of the month that they’d rather not be bothered with.

    I do think that’s an outdated objection, but I can see why they don’t want to.

  2. Pingback: Texas tells Amazon to pay up – Off the Kuff

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