Is the Tax-Free Era Over for Online Shopping?

Tucked into a Times report about a typically out-of-touch New York State budget crafted by the wizards of Albany comes this news:

Another $50 million [of state revenue] will come from requiring online retailers like Amazon that do not have a physical presence in New York to collect sales taxes on purchases made by New Yorkers and remit them to the state.

Is this the beginning of the end for tax-free Internet shopping?

There have been a lot of arguments over the years about why online merchants should not collect sales tax, many of them not very compelling.

Imagine how hard it is to be a brick-and-mortar shoe store, for instance, when your online competitors not only don’t have the brick-and-mortar costs to contend with but also don’t have to collect sales tax from customers.

The online sales tax debate has been heating up for some time now. Does New York’s move perhaps mark a tipping point?


david g

@david (#10), you'll notice I didn't quote the part about uneven taxation laws, I merely pointed out that Dubner said that online stores like amazon "don't have the brick-and-mortar costs to contend with". This presumably refers to costs of doing business like large rents, sales staff, etc. Online retailers (like mail-order) get huge cost savings by not having to deal with those things.

Anyway, the implication there was that the BaMs are getting double whammied by taxes and bigger costs. You could potentially argue the tax point, but not that BaMs' inefficiencies should be considered.

Marc F

As a taxpayer I already pay NY state the suggested estimate based on income. If they tax Amazon sales they will just lose that payment and come out even with me.

But as a small internet vendor, who does collect sales taxes for the 50 or so different tax jurisdictions within NY, I'm aware that the next step is my being required to do an enormous amount of paperwork associated with collecting sales taxes at the county level for the entire country and remitting them to a good portion of 50 taxing states.

This is another way politicians show their amazing ignorance of life at ground level in the private sector. If the Congress ever gets around to truly simplifying internet sales tax collection (say remitting 5% of all online sales to the feds along with a single spreadsheet of sales to each zip code and letting them duke it out with the states) we'll all accommodate ourselves. Until then it will be a battle between states looking for any nexus that allows them to tax and merchants looking to resist.

And with a 5% rise in spending in a year when tax collections are clearly going to fall, I'd say we might start a grassroots to cut legislative salaries by 50% as an alternative :-) - just to get their attention.

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Dale

While most online shops don't pass sales tax onto their consumers, they do pass on shipping and handling costs. Mailing catalog companies also do not pay sales tax. Brick-and-mortar stores don't have to charge shipping and handling. It usually evens out for the customer.

The differences start mounting up when the weight of the products ordered would make it cheaper to pay sales tax at a local store than it would be to pay for shipping on that item. In that case, the brick-and-mortar store has the advantage.

David Damore

Let me start by saying I am no fan of sales taxes. Paying the sales tax up front will save time and reduce stress when tax time comes. Virginia has a Use tax [and probably other states too]. So you as an individual owe taxes for Internet [and other] purchases if you don't pay on the front end.
It was a huge hassle to go back to all my Amazon, itunes and other online accounts to find my untaxed purchases to calculate my Use tax.
If was as citizens do not like sales/use taxes we should lobby our legislators and have them reduced and/or eliminated.
There were some good comments above.
What are your thoughts?

Brandon

I don't the answer to this question, but I think it may be illuminating if someone does know. What is Amazon's sales performance like in states where it does collect sales tax relative to states where it does not? If their sales don't vary proportionally, wouldn't that demonstrate that the presence/absence of sales tax is not the true differentiator between the online and physical store?

David Adams

"What is the sales tax position of mail-order companies? Why not just tax internet companies like mail-order?"

It's the same, and this issue of states not being able to collect tax on mail order purchases (internet or otherwise) has existed much longer than ecommerce has. It's just that ecommerce has heralded much more mail order commerce.

John

Hmmm... my uncle is administrator of a northeastern Native American tribe. If e-commerce is taxed, maybe I can convince him to start an Indian Country server farm and web host, and offices for e-commerce operations.

Larry Roth

I do not think New York's action marks a tipping point here. A number of states have tried before to force online sellers with no physical connection collect tax on orders made by their residents. The US Supreme Court stopped those attempts, most recently in its 1992 decision in Quill Corporation v. North Dakota. When this statute is challenged, it will almost certainly be struck down.

Since then many states have resumed this effort, even going so far as to lessen the appalling complexity and state-to-state variation of the sales/use tax laws, thus depriving the online sellers of one of their best arguments against such assessments.

The Supreme Court made it clear in Quill that it was up to Congress to make a decision in this area. So far Congress hasn't even come close to passing a statute authorizing states to force online resellers with no physical presence in the state to collect these taxes on behalf of the state.

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doug, ct

state of CT has similar measures in their legislature

Tim

I run a sporting goods online shop, and I can tell you there is no way I will be collecting NY state sales tax anytime soon, no matter what the NY legislature does. I'm based in Georgia and have no offices, warehouses, or any other connection to NY state.

MarleysGh0st

New York already requires its residents to declare the amount of sales/use tax we owe on internet and mail-order purchases when we file our state tax returns. If we haven't kept detailed records, a handy table, based on income level, is provided. This new law changes nothing, except for those who might disregard the stern warnings not to leave that line blank--or the even sterner warnings against perjury.

Robert L. www.neolibertarian.com

This comes up all over the place. Here's my letter to the editor when taxing internet transactions was proposed in the San Francisco Chronicle:

California businesses use large amounts of state services to operate and arguably the sales tax supports that. This is why current mail order companies must charge sales tax to in-state purchasers but do not charge sales tax to out of
state buyers.

Out of state stores are not protected by California Fire or Police Departments, do not use California based water or power, are not inspected by or regulated by any number of California bureaucracies and so on and so forth. When I buy from an out of state company, I don't pay for California government because I don't use California government and that's fair.

The more Californians use on line purchasing, the less need there is for California government services. There are two ways to address the budget deficit here: one is to levy an unfair tax on consumers but the other is to realize that a government that provides less services should need less money.

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Mrs. H.

Several years ago I read of a gambling case that depended on a very similar question: if I'm at a computer in a non-gambling state and gambling on a website whose infrastructure is in a legal gambling state, where is the transaction occurring? That seems to be a precedent for "does the sale take place where the buyer is or where the seller is?" Anyone remember the outcome?

Donald A. Coffin

With sales taxes, the argument is generally that the tax is levied on the buyer, and that the seller acts as the agent of the state in collecting the tax. In Indiana (as in most, or all states), sellers keep a portion of the sales tax collected (I forget at the moment what it is, and I'm not going to look it up) as compensation for their costs. It may be that calculation of taxes due is greater for internet-based sellers (but Lands' End seems to manage), and so might require slighly larger compensation for the costs involved.

The major confusion here is between the actual incidence of the tax (mostly on the buyer?) and the collector of the tax (the seller).

One reason that Congress may be slow in acting is that in some states sales taxes can be deducted (if, e.g., there is no state income tax, or if sales tax payments are larger than income tax payments) from federally-taxable income. So there might be a (small) effect of federal income tax collections.

Clearly the State of New York has a connection with a buyer of sporting goods who lives in New York.

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stephanie

From what I understand from my Macroeconomics course (which I'm currently enrolled in), sales taxes aren't levied on buyers - they're levied on sellers, who in turn pass that cost on to buyers. But the sellers themselves are actually responsible for the cost, which is why they are responsible for paying it to the government (instead of the buyer writing a separate check to the government for sales tax). Placing a "sales tax" line on your receipt just shows you how much lower your prices would have been if the government wasn't charging the store to sell things to you (because a ration-minded store owner would not want to eat that cost and take a loss in profits, obviously, so they usually pass the cost on to you).

Given that, it makes no sense for any state to be able to levy sales tax on a company not located in said state due to consumers being citizens of the state. If anyone was going to levy sales tax on the supplier, it should be the state where the supplier is located.

Although I personally don't feel like the government is necessarily entitled to the money it is "losing" by not collecting sales tax on e-commerce items, but that's an entirely different issue. . .

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Idea Guy

Seems like a lost revenue source for the states. And one that is only increasing every year.

And it's crazy to think that the states won't have to raise other taxes in order to offset these losses. We need to be responsible & start paying taxes on internet sales.

I think the best way to do it is for the federal government to step in & create a federal internet sales tax. Keep it low, around 3%. After deducting operation costs, the feds would keep 10% & then dispurse the remaining 90% to the states, proportionally based on population. Use of a portion of the funds could even be earmarked for SBA loans, and other small business initiatives to help both brick & mortar stores & online stores.

PK

Shouldn't the tax at least reward the state that nurtures companies that make money, rather than the state that nurtures shoppers? i.e. If I buy anything from CA, and I live in New York, would it make more sense to pay CA tax?

What if the online retailer is from another country? I buy records or shop on eBay, and very often the seller is from United Kingdom or from China. Is the US state going to tax that seller in China?

That is the ultimate legal problem of the Internet. Once you put something up online, you might have offended some laws in Germany. Internet does not have boundaries, while nations still do.

Kent

It's important not to use the word "exempt" with regard to Amazon and taxes. Amazon does not have an "exemption" from paying New York tax, because that would imply that New York state actually has the right to tax Amazon and is simply deciding not to exercise that right.

That's not true. A state has no right to tax an Internet retailer.

Why not? What has New York State ever done for Amazon? If a New York-based brick/mortar bookseller is charged sales tax, it's because New York can argue that it did many things to create an environment in which that store could do business.

When I buy something from Amazon, New York didn't contribute anything to Amazon's ability to sell to me and deliver its goods. So it doesn't deserve any of the profit.

David

david g(7) - Holding Amazon to the same taxation requirements that apply to B&M stores is not protectionist. Giving them an exemption that a store with a local presence doesn't have (even if they also have an online shop) offers online-only retailers an unfair advantage. It's a subsidy that may have been justified in the early days of the internet, but not anymore.

Amazon is certainly able to undercut its competition simply by not needing a physical presence and that's great. But they don't need a tax exemption on top of that.

DJH

Not sure what other court cases might be relevant, but Quill v. North Dakota (1992) surely plays a role (http://en.wikipedia.org/wiki/Quill_Corp._v._North_Dakota).