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

"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..."

How is this relevant? This is the same protectionist argument that many make in favor of raising trade tariffs. If amazon can do something more efficiently than the old brick and mortar store, why should Amazon we want to interfere with that?

If the free market decides that the convenience of instant shoe purchasing is worth a premium, then great... but let's not feel sorry for brick and mortar stores.

Don

Are you "more efficient" if a person goes to your "brick-and-mortar" competitor to see what fits best and which color they like best and then buys from you because he doesn't have to pay sales tax?

GDLL

It'll eventually happen. There's just too much money floating around for Congress not to want a bite. But as for New York's move, it'll come to nothing. What Amazon does is interstate commerce.

But I'm betting that despite Northern Virginia's pressure on the folks in DC, Congress will eventually pass a bipartisan bill forcing internet companies to pay a percentage back to the states. Democrats will get more money to blow, and Republicans will use the bill to get control over internet gambling and porn subscriptions.

Colin

But amazon isn't doing anything more efficiently, they are simply taking advantage of a government distortion in tax policy. The free market is when both companies operate under the same rules and you let the winners win and the losers lose. Amazon and brick and mortar aren't operating under the same rules, which is unfair.

Look, I am definitely a small government/anti-tax type, but I am also for applying rules fairly and avoiding government distortions of the market.

Justin

Going along with comment #3, how could NY possibly have any jurisdiction to make Amazon, or any other online retailer not in NY, collect their taxes?

DJH

As mentioned in comment #2 (Doug, CT), my home state of CT, in fact, DOES tax items sold over the Internet. This can happen in two ways:

1. Any company which has a physical presence in CT must collect sales tax as part of the sale itself. This is just the same as buying something over the counter and paying tax at that time.

2. When the seller has no presence in CT, it's not up to the seller to collect the tax; it's up to the buyer in CT to pony it up voluntarily. This is known as a "use tax" (as opposed to "sales tax").

The "use tax" covers the same things and has the same exceptions, and is the same rate as the "sales tax." So if you buy food online which would not be sales-taxed, no use tax is owed either. It's up to the buyer to know whether or not the item is taxable, and pay the use tax him/herself.

Of course, most of CT's buyers never actually pony up the use tax ... but that does not mean they don't owe it.

The problem for CT's Dept of Revenue Services is that they have few means of detecting these sales and going after those who don't pay them. Every once in a while, DRS agents will follow cars with CT license plates out of liquor stores in MA, back over the state line in CT, where state troopers pull them over, and they're cited for not paying use tax. (I'm not sure of the legitimacy of this tactic, though, because as I understand it, a buyer has a "grace period" during which s/he must pay the use tax -- a grace period which I assume is a little longer than 5 seconds after one enters CT! But I also assume the troopers and DRS don't really care much about little things like that.)

At any rate, CT definitely DOES tax online sales. They just can't compel sellers with no CT presence to collect it for them. The same is likely true of many other states and jurisdictions as well.

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Timothy

I disagree, a free market isn't about operating under the same rules, its about operating under no rules except for utility/profit maximization. If Amazon is capable of taking advantage of a "distortion in tax policy" thats them maximizing their profit and possibly a market failure. But I still feel that many online stored offer a lower price and wider selection than the brick-and-mortars have been able to offer. Not always, but often enough that I will often turn to the internet for my purchases.

But NC has tried to do the use tax also, you're asked to claim how much you purchased online when you file your taxes. I've never done this as it is interstate taxing and the only authority I recognize in that region is Congress, as I thought the Constitution clearly read. If that is true then I agree the only way to "fix" this is to have the Federal gov't step in and levy a tax on all online purchases.

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Jonathan

How is this enforceable? How do you define where the sale physically takes place? If the sale takes place at the location where goods and services are physically exchanged, then it takes place at Amazon's warehouse; once they receive the money they send out the product, and the tax should be collected by the jurisdiction within which the warehouse is located. Meaning Amazon should move to the state with lowest tax (taking all their other costs into consideration of course).

But if the sale is where the consumer makes the decision to buy, then it the jurisdiction is wherever the consumer is located when he's logged onto the Amazon website and placing the order. This isn't necessarily where he lives or wants the purchase shipped to. The true location of the consumer is easily concealed and difficult to determine.

If I'm staying in New York for a month, and during that time I buy something from Amazon, why should New York collect the tax? What service provided by the state am I using when I place that order? My telecommunication is already taxed (paid with my phone bill) and the transportation is covered (paid with my gasoline). The jurisdiction that deserves to collect it would be where company is physically located. This need not even be in the US.

I haven't read the court decisions on this, so these questions may have been answered already. Remember that though online purchases don't have to pay for brick and mortar they have much higher shipping costs to deal with. I shop online for convenience; I've never found it much cheaper.

New York's proposed tax is foolish and unenforceable.

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Brett Dunbar

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

In Europe internet-order companies are treated the same as mail-order as regards VAT. If the dispatch is from within the EU, VAT is charged at the rate of the customer's country If dispatch is from outside the EU (e.g. Jersey, Guernsey or Man) then VAT is not charged. There is an excise duty of 17.5% but that is not charged on purchases of less than ?18. Books are VAT exempt but music and DVDs tend to be sold by Amazon Jersey to avoid tax.

Panem et Circanses

They can drool all they want to about collecting big bucks from Amazon et al., but for every Amazon there are thousands of tiny companies, on which the state, after considering administrative costs, would lose money processing their payments. A lose-lose... not to mention the legality and constitutionality.

Douglas G. Turner

Those people that believe online retailers should pay sales tax are ignoring the basic concept of jurisdiction -- states do not have the right (per the U.S. Constitution) to regulate interstate trade, they only have the right to regulate companies with a physical presence within their borders.
The argument for fairness also falls short -- is it fair to force an online only retailer to comply with hundreds (perhaps thousands) of different sales tax levies. If you do not understand why the numbers are so high, then perhaps you should live in a high tax state, where we collect sales tax for baseball stadiums. Many states allow bodies other than the state to levy a sales tax.
The idea that a governmental entity can believe that it has the right to collect a tax on everything you purchase, where ever it was purchased, is very disturbing, and contrary to the principles of federalism.

Martin Seebach

I'll try to explain how this is implemented in EU. I'm not a tax lawyer or accountant, but I'm running a small business.

A) When an EU citizen buys something in another EU country, he pays VAT (sales tax) in the country where the store is located, whether or not it's over the counter or online.

B) When an EU citizen buys something outside of the EU, the package is randomly intercepted at customs check points at border-crossings. The recipient is then required to pay any levies, sales tax and a ~$10 processing fee - effectively killing private extra-EU trade in any but the smallest niches. This procedure can be avoided if the sender attaches an invoice and some sort of import form that documents that sales tax is already paid. I don't know the exact procedure for the seller for this - for a buyer, you just get an invoice with a local sales tax item.

I'm not sure exactly how sales tax works in the US - but in Europe, it's a tax on the business, not on the consumer, although the tax is specified and passed on 1:1 to him.
(VAT=value-added tax, i.e. roughly a tax on the difference of the price of purchased items and sold items. And if it's negative, the business gets money back)

As such it makes sense to always tax the business according to its location, not the location of the customer.

OTOH, if the purpose is to tax consumption, it should be paid in the location of the customer - and that's pretty hard without violating the privacy of anyone crossing borders, or via some sort of federal legislation that the seller is required to manage, collect and pay 50 tax-rates.

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Cliff

"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."

Wow!! I think we have found the only person ever to pay the use tax!

MEB

It would seem to me that the states have already been given the right to tax buyers for goods purchased at their discretion. The only reason they do no require sales tax collection by online retailers that do not have physical presence in their states is that it is not practical to do so. It would certainly seem they have the right to so so though.

The argument that it is hard or complex to collect state taxes is easily solved. Computer software runs all these online sites and if a law was passed to allow or force US retailers to charge sales tax, I am sure there would be 100 software vendors selling the software to do it. No big deal.

The notion that we would have the federal government collect this tax is a bad idea. The feds would then start requiring states to comply with various requirements to get their money. Bad idea.

The argument is that there is no way to enforce this across international borders is an excellent point but not really a reason to not do the right thing within the US. Perhaps some time in the future international law will be constructed to address this.

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spencer

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.

- Posted by Kent

Please explain to me how Amazon manages to deliver the goods to you without using the roads built by New York state government.

Gerald

Isn't it because of Amazon's Affiliate program why a lot of this hubbub is being justified by NY State?

Where NY affiliates, which can be interpreted as agents for Amazon, are generating income that aren't being taxed?

What if Amazon just got dimantled the affliate program for New Yorkers?

Chris

Um, hate to break it to you, but what Amazon is doing is hardly as vile or repugnant as some of you would like to paint it.

Amazon and other online retailers are not collecting sales tax, because it hasn't been effectively legislated.

BTW, this in a way poses a bureaucratic lernean hydra. Because sales tax varies in the States from state to state. There is (to my knowledge) no federal sales tax, because that *gasp* would send people screaming against the "evil forces of the Feds".

Mind you the US system is anachronistic and mostly 19th century. I apologize if anyone gets upset with me, but simply put its 50 state sales taxes are a bureaucratic monster for online retailers. 1 tax to rule them all would be both better and friendlier to business. Its mostly opposed, because states don't want to cede their income and power to the federal level.

Before anyone howls on business friendly. Can anyone comprehend what it would be like for the accounting department to manage such a monster.

In Germany online retailers collect sales tax. There is a federal sales tax. Many other European countries take the same approach. Yes, Amazon collects sales tax in other places of the world. It doesn't in the US, because it hasn't been properly legislated so far. And Amazon and other online retailers will lobby against it (who wouldn't), because its good for their business and because none of them are keen on juggling 50 different sales tax accounts they have to submit and balance.

I think it would be proper for the sales tax to be collected. Not out of pity with brick and mortar, but because its essentially law and has been avoided so far because of loopholes. Whats good for the goose should be good for the gander.

Just devise a proper system instead of every state trying to their hand at it. Otherwise online shops will start migrating their HQs to states with lower sales taxes. Domestic offshoring! ;)

If you want to tax it - fine! Just don't make it a bloody nightmare for the people who are employed in that sector. You might be railing against your own jobs. Law of unintended consequences anyone?

Just make it simple and painless, please.

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Helen

My employer has just completed the process of being audited by its state govt for failing to pay the required "sales and use tax", almost entirely on purchases made online. These purchases weren't made online to avoid taxation, but instead, to take advantage of the convenience of online ordering. If audits like this are the only way the states can truly enforce collection of the use tax, they are only going to get a small fraction of what is owed.

It seems like a better solution would be to eliminate the sales tax that brick and mortar shops must collect, and replace the tax revenue with an alternative, and hopefully, less regressive, form of tax.

Lunatic

No, the "tax-free" era isn't over.

New York State does not have the power to tell a business that doesn't have a physical presence in New York State to collect taxes for it, whether the mail-order is done via catalog or online; the federal courts made that abundantly and repeatedly clear.

Nor can New York State legally charge taxes on local mail-order businesses' sales to persons resident in other states.

Nor can a compact of states legally set up a compact under which businesses in all the states of the compact have to collect sales taxes for all the states of the compact on all sales to residents of the states of the compact.

That's the law, as laid down by the federal courts. New York State does not have the power to change it in any way.

(Well, if it secedes and manages to make it stick through force of arms, it can do whatever it wants, but . . .)

Now, Amazon may, through some sort of operations in the state, have made itself subject to New York State jurisdiction, but even if that is true, that won't touch any other mail-order businesses, catalog or Internet; it will only affect Amazon.

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DC

All part of the economic stimulus that the government's trying to encourage.