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Amazon, Internet Shopping, and Sales Tax

by Emily Guy Birken

One of the few bipartisan efforts going through Congress right now is a bill called the Marketplace Fairness Act. This proposal would require online retailers to collect state sales tax for purchases—taxes that would then go into the state coffers. Even though the bill has bipartisan support, it is still controversial and by no means a done deal. Here is what you need to know about the possibility of having to pay sales tax on your internet shopping:

The Current Law

Amazon internet sales taxBelieve it or not, the standard for determining how sales tax is levied on internet purchases was determined by the Supreme Court back in 1992. The Quill standard, named for the case of Quill Corp. vs. North Dakota, mandates that an internet retailer or company is only required to collect taxes if it has a physical location in that particular state. This is why you pay sales tax on any purchases made over Sears.com, since the company has a brick-and-mortar store in every state. But you don’t have to pay sales tax on purchases from many other popular online retailers.

Marketplace Fairness Act and States’ Rights

While there have been discussions in the past 20 years over whether the Quill standard is a fair ruling for the states, it took continuing changes in technology and increasingly dire state budgets for the cause to gain congressional support from both parties.

The bill would require all 46 states that levy sales tax to be able to charge that tax on any internet purchase made in that state. There is concern that getting the federal government involved in this case is stepping on the toes of states’ rights. Since individual states may not regulate interstate commerce, this bill could be construed as unconstitutional. As Steve DelBianco, executive director of Net Choice, stated to dailycaller.com, “you don’t simply grant the states new extraterritorial taxing authority just because they need the money, it needs to be based on removing barriers to interstate commerce.”

Amazon’s Support

Amazon is the 800-pound gorilla of online retailers, and it has for years resisted online sales tax measures as they have been proposed on a state-by-state basis. However, the retail giant is now throwing its weight behind the measure. According to Amazon Vice President Paul Misener, “the proposal provides for sales tax simplifications and other provisions that will make it even easier for third party service providers to assist sellers and the states.”

Therein lies the motive for their change in heart, according to Jim Tierney of multichannelmerchant.com. The “third party service providers” will be Amazon itself when individuals sell items on the Amazon Marketplace. For a small percentage of the sale, Amazon will offer individual sellers the option of having the sales tax chores—which could be onerous for someone just trying to sell some old college textbooks online—completely handled by the website. Considering the huge number of merchants selling on Amazon’s marketplace, this could become an enormous income-generator for the retailer.

Planned Amazon Sales Taxes

Even if the proposed bill does not come to fruition, many Amazon users may find that their purchases have a sales tax tacked on anyway. The retailer already charges sales tax in six states—Kansas, Kentucky, New York, North Dakota, Texas, and Washington—because it has distribution centers in those states. It has plans to open more centers in another eight states, including California, Pennsylvania, New Jersey, Virginia, Indiana, Nevada, Tennessee, and South Carolina.

If you live in one of those eight states, however, you may get a short reprieve before you need to pay sales tax. Amazon has been in negotiations with the states where it is placing distribution centers to hold off on collecting taxes for a period of time in exchange for guaranteeing the creation of thousands of jobs within the state. Provided the Fair Marketplace Act does not get enacted sooner, residents in those eight states will not have to start paying taxes until the negotiated time period is up—between September 2012 and January 2016.

Truly a Fair Marketplace?

While having to pay sales tax on my online purchases will alleviate some of my own personal guilt for not shopping locally, I do wonder if allowing the federal government to circumvent the Commerce Clause on states’ regulation of interstate commerce is truly fair. The Quill standard does give states an opportunity to push for physical presence (and the subsequent jobs) of online retailers in order to earn sales tax. Does that opportunity for competition constitute a level playing field? What do you think?


Published or updated August 16, 2012.
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{ 2 comments… read them below or add one }

1 DC @ Young Adult Money

My personal view on taxes is that they should all be abolished and a flat sales tax should be put in place.

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2 James

The lack of sales taxes has made internet retailing tremendously profitable and provided jobs and employment at a time when they are scarce and hard to come by. If you tax them that creates a drag on the industry and a drag on sales, resulting in job losses and decreased wealth.

So, this is a great idea if you want less prosperity.

Best,

James

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