The $23 Billion ‘Amazon Tax’ Loophole
Policy + Politics

The $23 Billion ‘Amazon Tax’ Loophole


Shoppers flooded retailers on Black Friday looking for door buster deals and setting new records for holiday sales. Then they scoured the web for the best holiday bargains on Cyber Monday, the e-commerce answer to the post-Thanksgiving shopping frenzy, which is also expected to smash last year’s records. The National Retail Federation expects 123 million Americans to shop online this Cyber Monday, up from 107 million last year. The data tracking firm comScore says consumers may spend $1.2 billion this year, surpassing last year’s record of just over $1 billion.

Amidst the online shopping blitz, one hot debate rages on: Should states collect sales taxes on electronic purchases?

If you are one of the millions of online shoppers, you probably haven’t paid a state or local sales tax on many of your purchases. You can thank a 1992 Supreme Court ruling that says online retailers don’t have to collect sales taxes in states where they lack a physical presence. Big retailers like Best Buy and Target that have nationwide stores still collect taxes both in store and online.

But for the online-only retailers this sales tax advantage, combined with free shipping, has made cyber bargains extremely attractive – too attractive, some say. An alliance of cash-strapped states and local governments along with advocacy organizations have been pushing Congress to overturn the Supreme Court ruling because they argue the rule gives online retailers an unfair advantage over brick-and-mortar companies.

“Sales tax fairness is about protecting small businesses and local retail jobs that are crucial to America’s towns and cities,” said Rachelle Bernstein, vice president and tax counsel with the National Retail Federation. “There is a significant competitive advantage from our brick-and-mortar retailers who contribute to the local community.” Bernstein said the NRF frequently hears stories from members about customers coming into a retail store to look and touch a product and then order it online where there is a price advantage, much of which is due to a sales tax differential. Sales taxes range from 5 to 10 percent, so local businesses that must charge the sales tax start with a sizeable disadvantage when competing against online retailers, the NRF argues.

Given the grim financial situation they have faced over the past four years, states have never had a greater need for more power to collect sales tax, says Neal Osten, Washington director for the National Conference of State Legislatures. The National Conference of State Legislatures estimates about $23 billion in revenue will not be collected from online sales in 2012 – money that could go to state and local governments that rely on sales tax to support essential services, schools and Medicaid. According to the Wall Street Journal, state and local governments lost approximately $11 billion in revenue from e-commerce sales in 2011.

And the stakes are only growing larger. According to Forrester Research, U.S. online retail sales grew 12.6 percent in 2010 to reach $176 billion. The research firm expects ecommerce to reach $278 billion by 2015. And as online sales grow, so does the value of purchases that avoid state and municipal sales tax. A study released last week by the Indiana Fiscal Policy Institute and Ball State University concluded that the Hoosier State alone loses between $40 million and $114 million a year in sales tax revenue not collected on online sales, with a similar amount lost on mail-order sales. The foregone revenue is higher in other states.

Any extra funds would be welcome news for cash-strapped states increasingly anxious to recover revenue and find creative ways to plug their budget gaps. Some 42 states and the District of Columbia have closed or are working to close $103 billion in shortfalls for fiscal year 2012, according to the Center on Budget and Policy Priorities.

Lawmakers seeking to help the cash-strapped states have introduced a handful of bills that would allow states to require online retailers to collect sales taxes from customers. Earlier this month, Sens. Lamar Alexander, R-Tennessee; Mike Enzi, R-Wyoming; and Dick Durbin, D-Illinois, introduced the Marketplace Fairness Act, which would give states the option to collect sales tax from out-of-state sellers. “This is not a new tax—this is a tax that is already owed,” Alexander said in a statement. In a letter to the senators today, the National Governors Association applauded the effort “to level the playing field between Main Street retailers and online sellers.”

But not everyone favors an online commerce tax. NetChoice, an advocacy organization that fights threats to online commerce, says it will hurt small businesses the most. Steve DelBianco, executive director of NetChoice, says relative to the pain imposed on small business, there’s little for states to gain in new tax revenue.

California, for one, didn’t see it that way, and this holiday season may be the last tax-free Cyber Monday for Golden State residents. Unless the federal government comes up with a national online sales tax, California's version automatically kicks in next September. Amazon, which has fought such efforts in Indiana and other states, has agreed to begin collecting taxes in California starting in September 2012. And if other states follow, the costs of shopping on Cyber Monday will soon head higher.