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News flash: The Amazon sales tax problem requires a federal solution

How many times do we have to say it?

State governments across the country are laying off teachers, closing public libraries and parks, and reducing health care services, but there is one place they could get $23 billion if they could only agree how to do it: Internet retailers such as Amazon.com.

That’s enough to pay for the salaries of more than 46,000 teachers, according to the U.S. Bureau of Labor Statistics. In California, the amount of uncollected taxes from Amazon sales alone is roughly the same amount cut from child welfare services in the current state budget.

But collecting those taxes from major online retailers is difficult.

Internet retailers are required to collect sales tax only when they sell to customers living in a state where they have a physical presence, such as a store or office. When consumers order from out-of-state retailers, they are required under state law to pay the tax. But it’s difficult to enforce and rarely happens.

That means under the current system the seller is absolved of responsibility, buyers save 3 percent to 9 percent because they rarely volunteer to pay the sales tax, and the state loses revenue.

You know why we don’t have this kind of problem with brick-and-mortar retailers? Because they automatically add the sales tax into the amount you owe them, and then it’s their responsibility to remit those taxes to the state. This should be ridiculously easy to accomplish with online retailers: Just apply the applicable sales tax to whatever state the ship-to address is in, and remit to the states as you would if you were an offline retailer. Your e-commerce backend should have no trouble keeping track of how much you owe each state. All that’s missing from this equation is the requirement to do it. As long as it’s up to each individual state, we’ll have these problems. The day that Congress passes a law addressing the 1992 U.S. Supreme Court decision involving catalog sales, Quill Corp. v. North Dakota, those problems vanish and the states and cities that depend on sales taxes will get a boost. This isn’t rocket science.

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11 Comments

  1. Daniel says:

    Great article. Thanks for your continued support on passing legislation that would require online only retailers such as Amazon to pay the same sales tax as their competitors are required to. This isn’t a new tax as others have claimed, it just applies the same rules to all creating a fair and level playing field.

  2. I’m also an Internet vendor- nothing like as large as Amazon, of course. I also sell at conventions, mostly in Texas but several times a year outside the state.

    Let me describe to you in detail the problems with a simple Federal mandate requiring mail order companies to pay sales taxes in all states:

    1. LICENSING. Many states, like Texas, issue “sales and use tax permits” for free with minimal paperwork. But several states also require a business license. When I sold at a convention in Maryland for a few years, I had to pay a nonrefundable, non-applicable-to-tax fee based on 2% of the inventory I’d be bringing into the state. Imagine if that were in all 50 states! Now imagine how many online retailers would stay in business if they had to pay a license fee equal to 100% of the value of all their inventory!

    2. OVERLY AGGRESSIVE TAX COLLECTION. I don’t do conventions in Illinois anymore. The last time I did a convention there- one weekend in the state- the Illinois Revenue Service tried to charge INCOME tax on my business for THE ENTIRE YEAR- that is, for ALL my business, whether or not I was in Illinois. It took over a year before they stopped harassing me. A flat mandate from Congress, without a federal mechanism for compliance, would expose me to not just Illinois, but other equally noxious tax systems- Massachusetts and Pennsylvania being among the worst reputed in my circles- and would, in turn, lead to much, much more unwarranted harrassment for taxes I do not owe.

    3. LOCAL TAX VARIATIONS. Here in Texas the statewide rate is 6.25%… but there’s a local tax variation that can add another 2% (and usually does). This is true for most states to some extent. Unfortunately, a mail order business has NO WAY OF KNOWING if the address they’re shipping to is inside or outside of a town’s city limits, or in a tax enterprise zone, or in or out of a Metro district or fire district or MUD, etc. etc. etc. They would have to get this information on EVERY SINGLE MAIL ORDER in order to be compliant with a flat Federal mandate- as if they had a storefront in every single home.

    4. PAPERWORK, PAPERWORK, PAPERWORK. I’m a small business, but it still takes me about an hour to file my one-page quarterly Texas sales tax report. I’ve recently obtained a permanent sales tax number for Louisiana as well, which has a two-page form and requires monthly filing. Illinois uses a four-page form for sales tax filing. A flat Federal mandate would require individual filing for each and every one of the fifty states- even if the amount sold in each state was ZERO for any given filing period. Compliance on that scale would require, at the least, twenty man-hours of work per month, or in other words hiring someone simply to keep up with the paperwork. Amazon may or may not be able to afford that; I certainly couldn’t.

    The thing is, I have no objection to charging, collecting, and remitting sales taxes on my mail order business- provided it isn’t so much trouble that it devours my business. That is EXACTLY what it would be, were Congress to say, “Every online retailer must file sales taxes in all fifty states.” If that were done, I’d have no choice but to shut down my online store entirely- it would be too expensive and labor-intensive to continue.

    If you want online retailers to collect sales taxes for interstate orders- INTERSTATE commerce, which individual states shouldn’t Constitutionally be able to tax anyway- then let the federal government do it directly. Make interstate orders taxes payable to the federal government- with only ONE filing requirement, and preferably ONE tax rate- and then let the feds divide the money with the states however they want.

  3. Jeb says:

    We shouldn’t overlook that the internet sales tax exemption also impacts the budgets of local governments and provides internet retailers with an unfair competitive advantage over local brick-and-mortar retailers.

  4. Ross says:

    Kris, you SHOULD be paying tax in states where you are present at a convention. You earned the money in that state, you own the income tax. Don’t want to pay, don’t go there.

    The taxes discussed apply only to online sales, not sales when you are physically present in a state. You always have to collect taxes when you are physically present, like at a convention.

    The complaint about tax codes for every locality are disingenuous. How do you think large retailers with stores deal with this? That’s right, there are services that will provide the taxing entities for every place in the country.

    Hmm, if we can get this passed, there may be a business opportunity providing services to small businesses that need tax filing assistance and data on taxing entities.

  5. BUM THE MAN says:

    AH! THIS SUCKS,I WAS PLANNING ON BUYING AN OOMPA LOOMPA NEXT WEEK!

  6. Ross: You misunderstood. Illinois didn’t want to charge income tax for just the weekend I was in Illinois; they wanted to charge income tax on EVERYTHING I MADE, IN ILLINOIS OR NOT. I collect sales taxes at conventions and remit them, and some states make this easier than others, but that should be the end of it. Certainly I should not be taxes by a state for business I DID NOT CONDUCT THERE.

    Retail locations have one fixed location that determines what sales tax is charged. Internet retailers would have to get local tax rates for EACH AND EVERY ADDRESS THEY SHIP TO, under Kuff’s proposed federal mandate. With a brick and mortar, there’s someone on site to find out these things; with mail order, especially small one-person mail order businesses, this plain is not possible.

    As for services to “provide” the information: at how many figures? Five figures a year? Six? Seven? Not that it matters to me personally, because ANY such expense would be beyond my means. You might as well hang out a big sign that says, “You must be a giant megacorp to offer mail order sales.”

  7. Mike says:

    >>As for services to “provide” the information: at how many figures? Five figures a year? Six? Seven? Not that it matters to me personally, because ANY such expense would be beyond my means. You might as well hang out a big sign that says, “You must be a giant megacorp to offer mail order sales.”

    Sounds reasonable to require a free service to provide such calculations. Similar to how you can look up address information / zip code information at USPS. Add a calculator to the IRS website or something, and require all states and localities to provide up-to-date information. Internet retailers would be required to collect the published rate for a given address.

  8. Ross says:

    If you look closely, you wouldn’t have to pay Illinois tax on everything you make, but like California, it appears you have to calculate the tax on your total income, then determine what percentage was made in Illinois, and pay that percentage of tax. For example, if your income was $100,000, and $1,000 was made in Illinois, you would calculate the tax on $100,000, then pay 1% of that amount. Part year taxes, and non-resident taxes are a pain.

    To be blunt, if you can’t afford to comply with the requirements of each state you operate in, or any Federal requirements, you shouldn’t be in an interstate business.

  9. Doug says:

    Amazon and many others may just lay off their workers here and move to Canada or some other near by country.

  10. Lola says:

    @Ross
    A bit hypocritical aren’t we? You don’t mind propping up brick and mortar businesses that can’t or refuse to compete and therefore try and find ways to tax people who buy online, but you are okay with basically killing all online businesses because they are not as large as Amazon. Whatever happened to supporting small businesses?

  11. Ross says:

    @lola, the people buying online owe the taxes, they just don’t pay them. The solution is to make the online businesses collect them. That makes the brick and mortar stores more competitive, since the online stores lose the scofflaw margin, the entities that are entitled to the taxes get them, saving the rest of us some money, and the people who provide tax services make some more money. I’ll repeat – if you can’t comply with the laws governing your business, you need to find something else to do.