Podcast: Avoiding Their Share: The Controversy over Amazon and Online Sales Taxes

March 30, 2010

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A lot of people think that one of the best things about shopping online is that you don’t have to pay sales tax. It turns out, that’s not quite the case.

I’m Shannon Spillane and joining me to explain -- and to discuss how internet retailer Amazon is going to extremes to avoid collecting sales tax from its customers – is Michael Mazerov, senior fellow with the Center’s State Fiscal Project.

1. Michael, clear up the confusion around sales tax and online shopping. Are we supposed to pay sales tax when we shop on the internet?

Yes, if your state taxes a book when you buy it in a store, then you actually are legally obligated to pay the same amount of sales tax if you buy that book on the internet.

2. So why don’t online retailers charge us tax when we shop online?

Back in 1992, the Supreme Court ruled that businesses don’t have to collect sales taxes in states where they don’t have a store, warehouse, salesman, or other kind of “physical presence.”

If the store doesn’t have a physical presence, then it’s left to the consumer to pay the tax directly to her state’s tax department. In many states there’s a line for calculating how much sales tax you owe on your state income tax form. But very few people know about it and even fewer actually do it.

3. This seems like a pretty narrow issue. Why is it so important?

Well, it may have been narrow at one point. But online sales are big business these days. Online sales just to households are expected to hit $170 billion this year, and online sales between businesses are even larger.

And, there are a number of reasons why all Internet sellers should have to collect sales taxes. Let me list three:

First, if a local shop has to charge sales tax but a big internet corporation like Amazon doesn’t, it puts the local business at a competitive disadvantage and can lead to the loss of local jobs.

Second, it also puts low-income families at a disadvantage. They are less likely to be able to afford a computer with an internet connection. Letting wealthier consumers avoid paying a tax that poorer families can’t avoid just isn’t right.

And finally, state and local governments will lose an estimated $8.6 billion dollars this year in sales taxes because of internet shopping. Right now, states are laying off teachers, cutting health insurance for kids, and making lots of other cuts that undermine the quality of life and investments in a prosperous future. They can’t afford not to collect every dime they are owed.

4. So where does Amazon come in?

Amazon is especially aggressive about not collecting sales tax. In fact, it only collects sales tax in five states. But, Amazon or its subsidiaries have a “physical presence” in 17 states.

5. Are states doing anything to try to get retailers like Amazon to collect the tax?

In 2008, New York passed a law saying that if an online retailer is located out of state but contracts with in-state businesses, or affiliates, to drive traffic to its website, that retailer has to collect sales tax. The law was called the Amazon law because Amazon is the nation’s biggest online retailer and it wasn’t collecting taxes in New York. North Carolina and Rhode Island have passed similar laws.

6. But these laws have lead to some controversy, no?

They have. A number of Internet retailers responded to New York’s law by eliminating their relationships with New York affiliates.

Amazon has also eliminated its affiliate relationships in North Carolina and Rhode Island. By cancelling the programs, Amazon can escape its requirement to collect tax. But it’s likely that Amazon also wants affiliates to pressure lawmakers to get rid of the laws.

And, Amazon publicly threatened to eliminate its affiliate programs in any other state that enacts this law. So, not only is Amazon retaliating against states that pass the law, but it’s also trying to send a warning to other states not to pursue it.

8. Should states be discouraged?

No, they shouldn’t. There is strength in numbers. If a significant number of states enact and enforce these laws despite threats from Internet retailers, eventually many retailers will likely begin collecting the states’ taxes.

9. Are these kinds of laws the only solution to the problem of untaxed Internet sales?

No, they aren’t. The best solution would be a national law that would set the same ground rules for all states and enable them to require big Internet companies like Amazon to charge sales taxes. The states have been trying to get Congress to pass a law like that for decades, but Congress won’t act. Until it does, states have a right and an obligation to pursue their own self-help strategies to level the playing field for their Main Street stores and preserve their ability to fund schools and other critical services.

Thank you for joining me, Michael.

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