Amazon's Tax Evasion Strategy Hurts State Budgets

Amazon's Tax Evasion Strategy Hurts State Budgets


Legislators rarely keep up with the times--think social media, driverless cars, flash trading. Another such development is the explosion in online retailing, and the issue of whether Amazon and its ilk should be required to collect sales taxes from their customers. This is not the simple “fairness” issue it might appear to be; as Internet retailing revenues explode, states are losing substantial revenues – revenues they desperately need. 

Yesterday’s major newspapers contained full-page ads from an outfit called the Alliance for Main Street Fairness, which wants to force online retailers to collect sales taxes. Though its proponents – competing merchants – have an obvious vested interest in the outcome, they make a strong case. First, it does seem unfair that Amazon, the real target here, can undercut its rivals by not charging sales taxes on goods sold in states where the company has no facilities. 

It is especially galling to e-tailers’ brick and mortar competitors because shoppers in each of the 44 states that levy sales taxes are legally required to pay them – even to a so-called “remote” vendor. Since this responsibility is met mostly through an honor system, and because there is rarely follow-up from the state, the tax is rarely paid. Alliance spokesman Danny Diaz points out that online companies are “putting consumers in a tough position, burdening them with unknown tax liabilities.”

Scott Peterson, executive director of the Streamlined Sales Tax Governing Board – an organization founded in 2000 to help vendors navigate the complex web of state tax authorities – cites a study by his group showing that uncollected taxes from all categories of remote sales will total $23 billion nationwide next year. That includes “non-electronic” sales to consumers and to businesses as well as Internet sales. This latter category is now a serious issue. Lost revenues from those transactions are already nearly half the total.

Certainly if there is a will to fix this seeming inconsistency, this is the time. States across the land face growing budget gaps and any pick-up in tax revenues would be welcome. Nebraska Tax Commissioner Doug Ewald has been quoted as saying that his state alone loses out on some $80 million to $120 million each year in lost revenues. That paves a lot of roads. 

Moreover, as much as we all like shopping in our pajamas, there is a lot to be said for the importance of brick-and-mortar stores in our communities. Small retail businesses create jobs – an important consideration as the nation struggles with 16 million people out of work.  

In addition, studies have shown that socializing improves our quality of life. Though “downtown” is an antiquated concept for much of the country, where hollowed-out town centers have become historic curiosities, the ascendant shopping malls provide much the same community focus. Imagine a world without food courts.

Worse, imagine a world without book stores.

Amazon's success has brought this issue to the fore and prompted Wal-Mart, Target and Best Buy to join the Alliance, even though most big retailers also sell their products on line.  Wal-Mart’s sales increased a modest 3% last year while Amazon scored growth of 39%. Overall, retail sales over the Internet grew nearly 15% last year in the U.S., and totaled $165.4 billion.

Industry analysts are expecting that figure to swell to more than $188 billion this year. That presents quite a dual challenge to states unable to collect sales taxes on those purchases, and to traditional stores that are losing market share. Consequently, large retailers, and thousands of others across the country, have banded together to demand the playing field be leveled.

Their approach is multi-faceted. Because two Supreme Court cases involving catalog sales in 1967 and 1992, respectively, threw the issue back to Congress, advocates are lobbying that body to pass the Main Street Fairness Act, sponsored by Senators Richard Durbin and Mike Enzi (one of each flavor). Not unexpectedly, Grover Norquist, head of Americans for Tax Reform, has stepped in front of the bill. As a result, its sponsors are having difficulty lining up GOP backers, and the bill is unlikely to progress any time soon. 

Undaunted, the Alliance (and the Streamlined Sales Tax Governing Board) is also working with the states.  Spokesman Diaz says, “We’ve made unbelievable progress this year in states like Illinois, Arkansas, South Dakota, and Connecticut.” He says the states are more motivated; his group hopes that bills that require tax collection will inspire Congress to act. 

Amazon is not giving up without a fight. In South Carolina, the giant retailer sidetracked the legislature from an unfavorable ruling on this topic by offering to invest $125 million in the state, build a distribution center and guarantee more than 125 jobs. A similar bargain was struck in Tennessee.

This is a bipartisan issue that Congress should address, openly and fairly. The anti-tax Norquist is wrong; this is not an example of adding new taxes, but simply enforcing the law of the land.  Sales taxes are due; somehow Congress should mandate that they are paid. As Peterson points out, there are several reasons that small companies lose out to bigger ones. Wal-Mart’s greater sourcing efficiencies, for instance, have put many mom and pop operations out of business. As Peterson says, however, “In the case of not requiring online companies to collect sales taxes, the government is in effect sanctioning anti-competitive behavior.”  He’s right. And, for the record, I love shopping in my pj's.

Related Links:
You're Probably a Scofflaw and Don't Even Know It (The Fiscal Times)
State Budgets:  Echoes of the B-Word:  Bankruptcy (The Fiscal Times)
States Bleed Red Ink Despite Tax Revenue Jump (The Fiscal Times)