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Marking a Milestone on Taxing Online Sales, but Still Far to Go

March 31, 2017 at 2:45 PM

As of tomorrow, Amazon.com will be collecting and remitting state and local sales tax on the sales of its own merchandise in all 45 states that levy such a tax. That’s worthy of celebration. Amazon’s sales will generate hundreds of millions of dollars in much needed revenues for states and localities, and the online retailer will no longer hold an unfair advantage over local shops that have always had to add sales tax to their prices.

Amazon’s ability to avoid collecting sales tax flowed from the 1992 U.S. Supreme Court Quill decision reaffirming that states couldn’t require interstate sellers to charge their residents sales taxes unless the retailer had employees or property in the state. Much of the press coverage of this new milestone has assumed that Amazon is now collecting tax everywhere because it has — or will soon have — warehouses in every state to minimize delivery times.

But this ignores an important history, which I’ve laid out: Amazon long claimed it didn’t have to collect sales tax because its warehouses were nominally separate corporations from the corporation owning its online retailing operations. That didn’t change until the Dallas Morning News questioned why Amazon wasn’t charging sales tax in Texas despite having a warehouse there, and the state revenue department sued the company for more than $250 million in back taxes. That drew national press attention, and Amazon eventually abandoned its aggressive position.

To Amazon’s credit, it’s now apparently collecting sales tax in many states in which it doesn’t have a presence — yet. But that’s overshadowed by the fact that Amazon isn’t charging tax on independent retailers' high sales volume — as much as half of the total merchandise sales —on the site, thus leaving many hundreds of millions in sales taxes uncollected. Amazon is willing to collect tax on those third-party sales, but it doesn’t insist on it as a condition of selling on the site. New York and several other states have considered legislation to close that loophole, but Amazon and other marketplace operators like eBay and Etsy have blocked the effort so far.

Amazon’s welcome new sales tax collection practices notwithstanding, thousands of Internet and catalog retailers — some with billions of dollars in sales — still collect tax in only a handful of states. The state-by-state battles will continue until the Supreme Court reverses Quill or the President and Congress set a reasonable, uniform national standard for sales tax collection covering all large online retailers.