December 30, 2010
I confess. I’m a state sales tax scofflaw.
Earlier this year, I purchased a handcrafted dining room hutch from an Amish workshop in Pennsylvania that was delivered in time for the holiday season. It cost $2,300. I paid no sales tax because I ordered it from the Internet catalog of a Florida-based electronic retailer. Since the company has no physical presence in my home state, it wasn’t required to collect its 6 percent sales tax. I “saved” $138.
I’m not alone. As the level of online shopping continues to grow, so does the value of purchases avoiding state and municipal sales taxes. E-tailers enjoyed their first billion dollar day this holiday season, and grew at double digit rates this year to about $172 billion or 7 percent of all retail sales, according to Forrester Research. By 2014, they will have seized 8 percent of the retail market, with no slowdown in sight.
Sales taxes are simultaneously “use” taxes, which means
they are still owed whether the retailer collects them or not.
But that means hard-pressed state governments, most of which are heavily dependent on sales taxes to support schools, Medicaid and other essential services, are seeing their tax bases erode faster than shoppers fleeing a half-empty mall. A University of Tennessee study published last year estimated states and municipalities would lose $8.6 billion in uncollected sales taxes this year, which would grow to $12 billion by 2014. That’s enough to cover about 15 percent of their projected shortfalls.
Just because that Florida retailer didn’t collect the tax didn’t absolve me from my obligation to pay. Most consumers think sales taxes are only extra charges tacked onto purchase prices. But they are simultaneously “use” taxes, which means they are still owed whether the retailer collects them or not. Almost no one self-reports these unpaid taxes, however. New York, which has one of the most aggressive state tax departments, includes a line in its state tax form for unpaid sales taxes. It is filled out by only 5 percent of filers.
In 2008 New York passed a law cracking down on online retailers who refused to collect the tax for the state. Dubbed the “Amazon law” after online retailer Amazon.com, the
law was an attempt to get around the 1992 Supreme Court decision in Quill Corp. v. North Dakota that absolved direct marketers, which these days means mostly online e-tail establishments and catalog companies, from collecting sales taxes if they don’t have a physical presence in a state.
New York claimed that Amazon’s affiliates program, where local non-profits like churches, schools and Boy Scout troops promote Amazon products for a small percentage of every sale that originated on their websites, amounted to having a paid sales force on the ground.
Jeff Bezos claimed a sales tax was overly complex and the company
shouldn’t have to collect since “we’re not getting any of the services.”
Amazon cancelled its affiliates program in New York, and challenged the law in court even as it began collecting taxes from consumers who ordered products online. When questioned about the suit at Amazon’s 2008 annual meeting, chief executive officer Jeffrey Bezos claimed administering a sales tax in thousands of jurisdictions where it does business was overly complex and the company shouldn’t have to collect since “we’re not getting any of the services.”
Other states are getting personal in their attempt to enforce sales tax collections. Colorado, which has one of the lowest state sales taxes at 2.9 percent, has asked online retailers to turn over the names of their customers so they can send bills. That has been challenged on privacy grounds, as has a North Carolina statute that tried something similar and was challenged by the American Civil Liberties Union.
The majority of states with sales taxes are encouraging online retailers to go along with a voluntary program on collections. Over the past ten years, a consortium of states developed a streamlined code of sales tax definitions that will make it easier for online retailers to levy taxes and turn them over to the states, which had been one of the main objections. Georgia this year became the 24th state to adopt the code. “State legislatures are looking for ways to raise revenue without raising taxes,” said Neal Osten, director of the Washington office of the National Conference of State Legislatures. “You’re going to see a lot more states taking a look at streamlining.”
The proposed law exempted retailers with less than $5 million in sales.
About 1,100 national retailers have already signed up for the program, including most of the large national chains like Target, Macy’s and Wal-Mart, which have bricks in to go along with their newer click-based retailing operations. Since most were already collecting taxes because they were vulnerable to enforcement action, the program has collected only $600 million in additional revenue for states since its inception in 2005, according to NCSL.
The original hope was that Congress would pass a law requiring “click-only” retailers, who are responsible for most of the unpaid taxes, to deploy the “Streamlined Sales and Use Tax Agreement.” But the measure, introduced in the just concluded session by retiring Rep. Bill Delahunt, D-Mass., died after garnering only six co-sponsors, none of them Republican.
It came under intense attack by NetChoice, a trade group representing online retailers. “Don’t believe it when tax collectors say their software makes it trivial for tiny sellers to collect everyone’s sales tax,” said Steve DelBianco, executive director of the group. “Small sellers will spend thousands of dollars making changes to their website software, plus endless time and accounting fees to handle exceptions, customer questions, and state tax audits.”
However, the proposed law exempted retailers with less than $5 million in sales. Moreover, software advances have made compliance fairly simple, according to some observers. “When this all came up 15 years ago, you could make a valid claim that this was hard to do,” said Robert Atkinson, president of the Information Technology and Innovation Foundation, which pushed for the sales tax exclusion for online retailers in the late 1990s. “You can’t make that claim today. In those days, it was infant industry protection. It doesn’t make sense anymore,” he said.
Amazon, whose spokeswoman did not respond to emailed questions for this story, is under increasing legal pressure to settle the issue. In the company’s most recent Securities and Exchange Commission filing, it revealed that in September Texas assessed the company $269 million for back taxes because of its distribution facility in that state. And in its most recent annual report, Amazon also revealed that its tax policies are being examined by numerous foreign countries including the United Kingdom, Germany, France and Japan, where it gets about half its nearly $30 billion a year in sales.
So why all the resistance to tax compliance? Online retailers get anywhere from a 3 to 7 percent price advantage by not collecting sales taxes, critics of company policies like Michael Mazerov of the Center for Budget and Policy Priorities have noted. Even Amazon noted in its 2008 annual report that “a successful assertion by one or more states . . . that we should collect sales or other taxes on the sale of merchandise or services could . . . decrease our ability to compete with traditional retailers and otherwise harm our business.” E-tailers argue that consumers benefit from lower Internet prices and deals on a wider variety of merchandise and are likely to balk if they have to pay taxes and shipping charges. But that hasn’t been the case in states where taxes are charged and consumers seem willing to pay both the freight and the taxes.
For now, at a time states are desperate for revenue, spending a few bucks to pay the taxes on a pair of sneakers from Zappos is a no brainer.