The Main Street Fairness Tax: Is it Time to Collect Taxes on Internet Sales?
Amazon. com, et al. v. State and Local Governments
In a 1992 decision, Quill v. North Dakota, the U.S. Supreme Court ruled that retailers are exempt from collecting sales taxes in states where they have no physical presence, such as a store, office, or warehouse. (The legal term for this physical presence is "nexus.") Although the case dealt with a catalog mail-order company, the ruling has subsequently been applied to all remote sellers, including online retailers. The Court said that requiring these companies to comply with the varied state and local sales tax rules would burden interstate commerce. The moratorium is in effect until November 1, 2014. Consumers who live in a state that collects sales tax are technically required to pay the tax to the state even when an Internet retailer doesn't collect it. Good luck on that one.
In its ruling, the Court specifically noted that Congress has the authority to change this policy and could enact legislation requiring all retailers to collect sales taxes without running afoul of the Constitution. "Congress," the Court declared, "is … free to decide whether, when, and to what extent the States may burden interstate mail-order concerns with a duty to collect use taxes." Later on I will discuss proposed legislation to do just that.
According to a study by Forrester Research (http://www.forrester.com/rb/research), e-commerce will continue to grow at a 10% annual compound rate through 2014. It forecasts online retail sales in the U.S. will be nearly $250 billion, up from $155 billion in 2009. Last year, online retail sales were up 11%, compared to 2.5 percent for all retail sales.
Some other statistics from the U.S. forecast:
- e-commerce sales will represent 8 percent of all retail sales in the U.S. by 2014, up from 6 percent in 2009
- In 2009, 154 million people in the U.S. bought something online, or 67 percent of the online population (4 percent more than in 2008)
- Three product categories (computers, apparel, and consumer electronics) represented more than 44 percent of online sales ($67.6 billion) in 2009
The online retailers will fight tooth and nail against any proposal to institute a broad-based sales tax on internet sales. Yet some companies like Amazon already calculate and collect sales tax in at least 44 of the 45 states that levy them for independent companies that sell their merchandise on Amazon’s website. For example, Amazon collects sales tax on behalf of every sales tax state except Vermont for sales made on its site by Target.com (the web affiliate of Target stores.)
Another indication that Amazon has the capacity to comply with state and local sales taxes is that it fully complies with “value-added” taxes imposed on its sales in foreign countries. Foreign VATs are analogous to state sales taxes at the final retail level, but international law is much clearer than U.S. federal law in requiring that such taxes be collected. One might imagine that if collecting such taxes were in fact excessively burdensome to Amazon it would discontinue sales in foreign countries.
These facts strongly suggest that Amazon would be able to calculate and collect sales tax for every state in connection with sales of its own merchandise with the proper software, which already exists. The additional effort and cost involved in filing returns with and transmitting payments to state revenue departments would be relatively small compared to the cost of purchasing the software needed to calculate the proper tax, integrating the software into its billing system, and collecting the tax from purchasers — all of which Amazon already does in the states in which it has a physical presence. Amazon is no different from the hundreds of companies like Walmart, Barnes & Noble, and Best Buy that are obligated to charge sales tax in all or nearly all states on their Internet and catalog sales because they have a physical presence within the states.
Congresses reluctance to extend sales tax collection to online retailers results in an unfair public policy with the following effects:
- Exempting online retailers from having to collect sales tax, as regular stores must, gives these companies a 4 to 9 percent price advantage over local stores — a sizable competitive advantage in retailing.
- It undermines state and local governments by reducing tax revenue for schools, police, and other services. This revenue loss will grow as internet sales continue to displace in-store sales. Currently, 45 states assess sales taxes, from which they receive about 25 percent of their total revenue each year. A 2009 University of Tennessee study estimated that uncollected sales taxes on e-commerce cost states $7.7 billion in 2008.
- It makes a regressive tax more regressive, because only those with internet access, a credit card, and a home or workplace where they can accept daytime deliveries are able to take advantage of the tax exemption.
In 2008, New York became the first state to further extend the definition of nexus to cover some web-only retailers, including Amazon.com. The legislature passed a bill, accompanying its budget, that said that web retailers have nexus in New York and must collect sales taxes if they have sales affiliates in the state that generate a combined total $10,000 a year or more in revenue for the retailer. (Sales affiliates are individuals or organizations that are paid commission for linking to the online retailer's web site. Amazon.com has thousands of sales affiliates nationwide, as do many other online retailers. In all, more than 30 companies are covered by New York's provision.)
On November 4, 2010, a New York state appellate court ruled that New York's law does not violate the commerce or due process clauses of the U. S. Constitution. The case was brought by Amazon.com and Overstock.com, which argued that the state did not have the authority to require online retailers to collect sales tax based on the nexus provided their in-state sales affiliates. Now, several other states have adopted or are considering legislation modeled after New York's. Just last month Illinois passed similar legislation.
We may find out soon whether internet sales retailers without a physical presence in a state remain exempt from collecting sales tax. Senator Dick Durbin (D-IL) is expected to introduce The Main Street Fairness Tax in Congress as early as this week that ends the tax-free status for Web purchases. Durbin's proposal is intended to push Internet vendors to collect state taxes on items purchased out of state. It's important to have a federal law so online shoppers in one state with the tax do not have their purchases sent to another state that does not.
No one likes to pay more taxes. However, as a society we have to realize that the number of people dependent on the federal, state and local governments for basic needs has significantly increased in the past five to ten years. The states can't be faulted for all of their budget woes. States like California have enormous responsibilities because of the number of illegal immigrants and the after effects of the collapse of its housing industry. The problem will get worse in the future because we have a lot of educated but unskilled or unprepared workers already in the workforce, and more to come, at a time when other countries are passing us by in advanced-skills fields such as math, science and technology. We, as a nation, must make a choice whether to continue down the path of increasingly becoming a welfare state or neglecting the needs of the growing numbers of people who are unable to provide for their own well-being or who choose to rely on the state to provide for their needs, or those who just don't care. The Main Street Fairness Tax provides a vehicle to increase state and local government resources and it levels the playing field for in-state retailers.
Blog by Steven Mintz, aka Ethics Sage, April 27, 2011