Amazon’s New Sales Tax Collections in California Worth Millions — But States Can Still Do More

Tomorrow, September 15^th, marks a significant milestone in the world of state taxation.  That’s when Amazon.com, the largest Internet retailer, will begin charging sales tax to its customers in California.

Not that long ago, almost no one paid sales tax when they bought something online — costing states billions of dollars that they could otherwise spend on our schools, health care systems, and other priorities, and shifting the tax burden to bricks-and-mortar retailers and customers.  Today, a host of online retailers collect sales taxes everywhere and, as the New York Times recently reported, Amazon collects sales taxes in seven states including New York, Pennsylvania, and Texas.  As of tomorrow, California makes eight, and the company has committed to charging sales taxes in six more over the next several years.

Amazon has had facilities in California for several years — including Lab 126, which conducts research and development on Amazon’s Kindle — and now it will finally help to pay for the public services those facilities receive in all the ways that other California-based merchants have always had to do.

The tax collections could be worth as much as $158 million to California’s treasury, according to the state’s finance department.  The state needs that revenue to preserve critical services; my CBPP colleagues recently found that California enacted the sixth-deepest cuts in state aid to local schools over the past five years.

Amazon’s competitors in the state, ranging from small independent bookstores to Best Buy and Wal-Mart, are also thrilled that they will no longer start with a 7.25 to 9.25 percent pricing disadvantage that flows from their obligation to charge taxes that Amazon didn’t.

Yet, these welcome developments are only a piecemeal solution to the problem of uncollectible sales taxes on Internet (and catalog) sales — which now cost states and localities an estimated $23 billion annually.  Amazon itself is still resisting collecting tax on many transactions and in the vast majority of states.  (Purchasers are legally obligated to pay these taxes directly to the states if the retailer doesn’t collect it from them but, of course, few do.)

The comprehensive solution rests with proposed federal legislation that would empower states to require all large Internet and catalog sellers to collect sales taxes.  While this legislation has growing bipartisan support and is making headway on Capitol Hill, there’s no guarantee that Congress will enact it.

So, even as states push Congress to pass the “Marketplace Fairness Act,” they can — and should — do more to chip away at this problem.  For example, many states, including California and others where Amazon has agreed to collect sales tax, need to enforce a seller’s obligation to charge sales tax when selling merchandise that nominally is owned by a different business.  And almost all sales tax states still need to enact the kind of law that requires Internet merchants to collect tax in states in which they have marketing representatives known as “affiliates.”  This kind of law brought Amazon to the bargaining table in California and, if it’s widely adopted, it has potential to pressure many other Internet retailers to do the same.

California, Texas, and the other states that have persuaded Amazon to agree to collect sales tax can justifiably celebrate the contribution this will make to a fairer tax structure and the preservation of critical services like education and healthcare.  But much work remains.