Amazon: Giving Up the Fight on Internet Taxes?

Cash registerThat Illinois is experiencing a crippling budget crisis is old news. Illinois’s budget deficit has grown to $8.3 billion in the current fiscal year, including $5.5 billion in unpaid bills—a chronic problem for Illinois state government. In fact, of the five most populous states, Illinois, along with California, are facing the most immediate problems because the emerging gaps are opening in the current fiscal year.

One way that states have tried to plug these deficits is by cracking down on the collection of the sales tax on items bought on the Internet. It’s estimated that states will lose approximately $23.3 billion in 2012 from being prohibited from collecting sales tax from online and catalog purchases, and a six-year forecast puts this number at $52.1 billion lost. With nearly every state still facing budget shortfalls, this revenue could help fund police, school teachers, and other much-needed programs. The catch has been that several Supreme Court cases precluded states from requiring a retailer to collect the tax. These cases, which dealt with catalog companies, held that requiring out-of-state companies to collect different state and local sales codes was a violation of the Commerce Clause because it imposed unreasonable burdens on them. As a result, only states in which a company has a nexus, through the presence of retail outlets or distribution centers, can be required to collect sales taxes. Even though retailers were not required to collect the tax, purchasers were still required to pay it, however, few even knew of this obligation let alone paid it.

Yet, technology and the e-commerce boom have changed the landscape and the rationale behind the previous court decisions. As a result, New York enacted a law defining “nexus” or presence more broadly in order to be able to require internet sellers to collect sales taxes. Six other states—Rhode Island, North Carolina, Illinois, Arkansas, Connecticut and California—have followed New York's lead, adopting similar laws that require online retailers with sales affiliates based within their borders to collect sales tax. California's law also extends the obligation to collect sales taxes to online retailers that have subsidiaries or affiliated companies in the state. South Dakota and Colorado have also passed laws requiring online retailers to notify their customers that they owe the state's use tax on purchases in which sales tax is not collected.

Illinois and North Carolina were among the first states to enact an amnesty program. Illinois’s program allowed residents to pay sales taxes on items they purchased online from June 30th, 2004 until December 31st, 2010 without penalty, hoping to bring in some revenue. Unfortunately the program only brought in $10.2 million of the estimated $150 million lost in Internet sales tax revenue the state could have gained with a federal law mandating Internet companies pay a sales tax. North Carolina’s program, on the other hand, specified that if Internet retailers commenced collecting sales tax on products sold to North Carolina state residents the state would, in turn, forgive taxes, penalties and interest for periods, and it would not seek information about customers who bought from them.

Additionally, in March Illinois’s Governor, Pat Quinn, signed the Illinois Internet tax law (Public Act 096-1544), which requires online retailers that work with affiliates in the state to collect sales tax on purchases made by Illinois residents and businesses. By defining and expanding the meaning of “physical presence” beyond a warehouse, factory, or office, Illinois has basically said that, regardless of whether or not a company has a brick and mortar presence in the state, if the company uses websites (either their own or by contacting with affiliates in the state) to refer business to an online retailer, it is subject to the sales tax. This is equivalent to a call center or warehouse, both of which would be considered a sufficient “nexus” under the law.  

For years Internet companies like Amazon and vehemently opposed such laws. Not being required to collect sales taxes provided them with a business edge over brick and mortar stores. When New York passed its law, Amazon refused to collect sales tax and brought suit challenging it. It also cut its ties with its affiliates in New York and other states that had passed similar laws expanding the definition of “nexus.”

Yet, recently Amazon agreed to began collecting the tax in California. The reason for Amazon’s change of heart after battling so long against it appears to be two-fold. First, Amazon had more of a presence in that state that any other, and it had too much to lose to try to move its business operations. Amazon has a technology division in California that developed the Kindle. Second, there were simply too many jobs in California that it would have to move across state lines, like the company had been doing in the past to avoid such laws. Finally, the amount of revenue Amazon generated from California sales encouraged it to concede.

Amazon isn’t keen on cutting the same deal with other states—it maintains divisions in several other states where it currently does not collect sales tax, claiming that its e-commerce operations are a separate company. But now that it will be paying in one state it will be harder not to do it in others.

In the meantime, legislators are realizing that federal legislation on the issue should be passed. Such legislation, the Main Street Fairness Act, (S. 2701 and H.R. 2701), was introduced in 2011 by Illinois’s own Senator Dick Durbin, and similar legislation was introduced in 111th, 110th,  109th, and 108th Congresses.

Similarly, the  Streamlined Sales and Use Tax Agreement coalition is trying to create a model uniform Internet  sales tax law. Thus far, at least 24 states have signed on to it: Arkansas, Georgia, Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Nebraska, Nevada, New Jersey, North Carolina, North Dakota, Ohio, Oklahoma, Rhode Island, South Dakota, Tennessee, Utah, Vermont, Washington, West Virginia, Wisconsin and Wyoming.

Technology has discredited the ”burdensome” excuse, and with budget deficits increasing and potential revenue sources limited Internet companies will not have the ability to evade collecting sales taxes much longer. With Amazon opening the flood gates by making a deal to begin paying the tax in California in 2013, states are sure to increase their pressure on companies as well as the federal government to pass the Main Street Fairness Act. 

This blog post was coauthored by Alison Terkel.


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