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Sep 11 2011

The California Amazon Internet Sales Tax Compromise Signals a Shift to a National Online Tax?

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Unfortunately, yes in the long term.
American consumers have long enjoyed a nifty tax break that often helps offset those pesky shipping charges when they buy online. If the online seller doesn’t have a storefront or a warehouse in their state, they don’t pay sales tax.

But that free ride, rooted in a nearly 2-decade-old U.S. Supreme Court decision, may be coming to an end. Online sellers like Amazon.com are facing mounting pressure across the country to collect sales taxes as government officials and brick-and-mortar retailers alike complain that they’re being cheated.

The latest sign of the sea change is a deal hatched in California with Amazon in which the online behemoth agreed to drop its multimillion-dollar referendum campaign and commit to collecting sales tax a year from now unless Congress imposes new national rules.

“It’s really kind of significant because it’s an agreement by Amazon to do what it’s refused to do all across the country,” said Danny Diaz, spokesman for the Alliance for Main Street Fairness, a Washington, D.C.-based coalition of large and small retailers trying to close the online sales tax loophole.

While Seattle-based Amazon is hardly the only online retailer, it’s the big fish in the Internet commerce pond, with 33,700 employees and 2010 sales of $34.2 billion. Founded in 1994, Amazon has aggressively fought efforts to collect sales taxes in states where it has no on-the-ground presence.

And, will the push for a national VAT (Value Added Tax) or national sales tax be far behind?

Probably not, when less than 50 per cent of all Americans pay any income tax at all. A consumption tax could be argued to be more fair.

But with hard times cutting into state budgets and traditional retailers’ balance sheets, a growing number of states have been eyeing the Internet and catalog retail industry — with some 16,000 companies driving $235 billion in sales — as a source of lost revenue. Closing the online sales tax loophole could deliver $23 billion in additional tax revenue to the states, according to Americans for Tax Reform.

California is a latecomer to the close-the-loophole party. New York required online retailers to collect sales tax four years ago, and Amazon has been collecting the levies and putting them in an escrow account while battling the Empire State in court. States such as Illinois, Arkansas, Connecticut, North Carolina and Rhode Island have taken similar steps, and even low-tax Texas is toying with the idea.

But, other online firms may not be willing to compromise like Amazon.com and may fight – probably in court. But, who knows if they will be successful since applicable law was decided prior to the explosion of online sales.

Amazon hailed the agreement as a “bipartisan win-win.” But the company’s deal with the state hasn’t sat well with other online businesses.

“We’re surprised that Amazon’s doing it because the California law in our view is unconstitutional,” said Jonathan Johnson, president of O.co (also known as Overstock.com), the Utah-based online retailer with 1,500 employees and 2010 sales of $1 billion. “There’s no reason to acquiesce to enforcement of it now or a year from now.”

The compromise also frustrated Loren Bendele, CEO of Savings.com, a Los Angeles-based affiliate marketer for online bargains. The firm was dumped by Amazon and other online retailers after California passed the new law.

Bendele said getting the business back from Amazon isn’t much help if the other online firms don’t take Amazon’s lead.

And, it is doubtful that political conservatives will be too amenable in the GOP controlled House for what is called a “massive money grab” by Grover Norquist of the Americans for Tax Reform. So, the prospects for a quick resolution and the imposition of a national online sales tax may take some time. But, it is probably inevitable due to government’s insatiable thirst for new revenue.

One proposal, the Main Street Fairness Act by U.S. Sen. Dick Durbin, D-Ill., would require online retailers to collect sales tax regardless of whether they have a physical presence in the buyer’s state. It’s tied to an effort to establish more uniform sales tax definitions among the states to make it easier for interstate merchants to collect the tax.

Henchman said the complexity of local sales tax schemes has worsened since the Quill decision — from 6,000 sales tax jurisdictions nationwide two decades ago to more than 9,600 today. It was considered a major accomplishment, he added, when the streamlined sales tax effort agreed to “a uniform definition of candy.”

While the National Retail Federation and even Amazon have indicated support for the Main Street Fairness Act, it has drawn opposition from political conservatives. Grover Norquist, president of Americans for Tax Reform, calls it a “massive” money grab sought by leaders in high-tax states.

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