Finance

The Latest on the Amazon Tax in States, Courts and Congress

While Congress stalls on federal online sales tax legislation, a growing number of states are now taking advantage of the extra revenue -- but not without a fight.
October 24, 2013
AP/Paul Sakuma

States and localities are still wrestling with the online sales tax. Just last week, a court struck down Illinois' attempt to tax online sales. Moreover, the inability to apply the tax evenly over all retailers creates an unlevel playing field: Physical stores -- WalMart and Target, for example -- have to collect the tax on all purchases, whether someone buys an item in their stores or from their online site.

Everyone interested in working out a solution to the online sales tax problem awaits the next move from Congress (more about that later). Meanwhile, a growing number of states have forced Amazon and other major online retailers to collect the tax on purchases made by people in their states and are winning lawsuits to back up their approaches. In terms of Amazon alone, about one-third of the U.S. population is currently subject to sales tax on purchases from the site. By next year, thanks to state efforts, the huge online retailer will be collecting sales taxes from half of its customers. The number will grow in the coming years as more states impose collection mandates -- or already imposed mandates reach their implementation date.  South Carolina's legislature, for instance, passed an Internet sales tax collection law, but Amazon does not have to begin to collect it until 2016.

Here are updates on how the online tax base has expanded and on court and Congressional action.

 A Growing Amazon

The inability to tax sales from online-only retailers goes back to a 1992 Supreme Court ruling that held it was an undue burden to ask retailers who had no physical presence in a state to collect state and local taxes in that jurisdiction. At the time, the ruling applied mostly to mail-order catalogue sales -- but then Internet sales became part of the nexus rule.

Amazon (and other online retailers) has for years curtailed its physical presence in states to avoid collecting a sales tax. More recently, Amazon has started to offer "next day" delivery. Many of the products Florida customers buy from Amazon, for instance, come from a warehouse in Memphis, Tenn., which is 1,000 car miles from Miami -- making next day delivery difficult. To improve its service, Amazon (and other online retailers) has built warehouses closer to its customers and now has facilities in 18 states.

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Many of the states with those warehouses consider the location of such facilities to the place where taxation applies. In legislation that went into effect Sept. 1, for instance, Virginia applies the sales tax to out-of-state sellers that maintain a distribution center, warehouse, fulfillment center, office or similar location in Virginia that facilitates the delivery of tangible personal property. Georgia expanded its definition of  "physical presence" to include companies that use warehouses or offices in the state, whether they own them or not.  The state, where collections started on Sept. 1, expects to haul in $16 million a year in online sales tax.  At the end of the year, it will also include companies that have click-through advertisements on Georgia-based websites, known as affiliate relationships.

The Affiliate Wars

Several states have tried to insist that Amazon and other online retailers, such as Overstock.com, collect the tax by claiming the affiliate relationship gives the online retailer a physical presence in the state, but Amazon struck back. When Illinois, Minnesota and Missouri passed affiliate laws, Amazon dropped its affiliates in that state.

In New York, it took the state to court, arguing that the affiliates were not employees and the company did not have a physical presence in the state. In March, New York's Court of Appeals disagreed and said affiliates constituted an in-state sales force. Amazon is taking its appeal of that decision to the U.S. Supreme Court.

Meanwhile, the Illinois Supreme Court just last week invalidated the state's affiliate law. The judge writing the majority opinion questioned whether there was any substantial difference between out-of-state businesses reaching Illinois consumers through a click-through-nexus approach or through other approaches that aren't taxed. Like Amazon in New York, the state's Department of Revenue may ask the U.S. Supreme Court to intervene.

Colorado's Court Fight

You could call it the annoyance factor. Colorado's online retailer law passed in 2010 imposes extensive reporting requirements on Internet retailers that don't collect Colorado's 2.9 percent use tax on purchases. Among other things, the law requires non-collecting online retailers whose gross sales in Colorado exceed $100,000 to mail annual notices to residents who purchased more than $500 in goods from them during the preceding calendar year, telling them they owe the tax. The company must also file annual reports with the Colorado Department of Revenue that include consumers' names, addresses and the amount of goods they purchased during the previous year. (Tennessee is another state that demands Amazon.com remind its Tennessee customers that they may owe taxes.)

Colorado's law was intended to urge non-collecting retailers to start charging the tax. Last year, a federal judge blocked the state from enforcing the law, saying it placed an "undue burden on interstate commerce." This year, a federal appeals court ruled that the lower court overstepped its jurisdiction in tossing out the law. The court sent the case back to the district court to lift the permanent injunction. The decision cited the Tax Injunction Act, which states that federal courts shouldn't enjoin, suspend or restrain any state tax assessments or collections if the disputed matter can be resolved by lower courts. "We are satisfied that Colorado provides avenues for remote retailers to challenge the scheme allegedly forcing them to choose between collecting sales tax and complying with the notice and reporting requirements," the ruling states. One report estimates the online collection to be worth $172.7 million last year.

A National Solution

In the spring, the U.S. Senate passed the Marketplace Fairness Act. Under it, retailers with at least $1 million in annual sales outside of their home states would collect sales tax from their customers, wherever they reside. Amazon supports the bill. (Why? One theory: Faster shipping times and lower prices may have eclipsed the need for a sales tax advantage.)

The bill is now in the House of Representatives where, before Congress got bogged down over budget resolutions and debt ceilings, House Judiciary Committee Chairman Bob Goodlatte released his seven basic principles for a remote sales tax bill. In brief, they cover tax relief (no new taxes not faced in offline world); tech neutrality (compliance no greater than offline businesses); no regulation without representation (direct recourse to protest unfair enforcement); simplicity (no onerous compliance); tax competition (governments able to compete to keep tax rates low); states' rights (no federal mandate to impose compliance burdens); and privacy rights (protection of customer data).

In a recent post on the Tax Foundation's blog, Joe Henchman noted that neutrality "is probably the biggest sticking point." Internet retailers, he argued, would have to collect sales taxes and comply with the confusing variety of sales tax rules for every jurisdiction where they sell (most of the 9,646 U.S. jurisdictions with a sales tax).  Brick and mortar stores only collect sales tax in the jurisdiction where the store is physically located. "This disparity," he added, "will continue so long as it's harder to comply with 9,646 sales taxes than it is to comply with one sales tax."

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