Amazon in Pitched Battle Over Sales Taxes
Perhaps the biggest battle over sales taxes is taking place right now between online bookselling pioneer Amazon.com and numerous states. It does not look to be reaching booksellers who list on Amazon or its subsidiary sites (AbeBooks) yet, though it could affect dealers who also serve as Amazon "affiliates," that is, those with websites that direct customers to the Amazon site in return for a percentage of the sale Amazon makes to those consumers. Perhaps, Amazon's tough stand may lead to a reevaluation of state sales taxes, in which case this battle could affect everyone who sells on the web. One thing is clear - Amazon has no fear of playing hardball at the highest level with anyone. They do not back down.
State and local sales taxes are the proverbial can of worms of interstate commerce. If you sell a book at your local store, you collect your state and local sales taxes, whatever they might be, and it's a nuisance but not all that difficult. However, if you are Amazon, or any online bookseller, you sell in every state and locality around the nation. Each of those has its own state and local tax rates, and each a list of items that are and are not taxed. And, each of those states and localities believe it is entitled to collect tax at its own rate on every sale made to one of its residents, even if the seller is located in, say, Seattle, Washington.
Not only do the states and localities feel this way, so do local businesses. Barnes and Noble does not like the idea that Amazon can sell into its market and offer customers tax free shopping, while they have to collect a tax that may run close to double digits. If you have a local shop, you probably feel the same way. It's unfair competitively.
However, if you are Amazon, or if you sell nationally over the internet, the thought of collecting local sales taxes is daunting. You have to figure out, for every customer, what the tax rate is for his or her state and locality. If all you sell is books, it is easy to figure out whether your product is taxed, but if you sell thousands of items, like Amazon, you also have to figure out which items are taxed in which states, and which are not. Talk about a headache! Then you have to file forms and make regular payments to 45 different taxing authorities (Oregon, Montana, Alaska, New Hampshire, and Delaware do not impose sales taxes), while collecting varying amounts for different localities within each state, since each town may tax at a different rate. An Amazon would be a bit more equipped to handle this as they could afford some advanced software to automate the process, but for a small bookseller this could be a bookkeeping nightmare beyond comprehension.
The burden collecting such sales taxes would impose has never bothered the states much. They want the money. They would be happy to impose the burden on out-of-staters. However, years ago, the U.S. Supreme Court said no. They said such a requirement would place an illegal restraint on interstate commerce. Therefore, businesses could only be required to collect sales taxes if they had a "nexus" with the state in question. A "nexus" means some sort of connection, and just what is a sufficient connection to require a business to collect sales taxes on behalf of a state has been litigated over the years. Generally, it is thought to mean some sort of physical presence. The surest way to avoid the tax-collecting burden is simply to have no connection at all with states other than the one in which you are located.
States have attempted to get around this problem by imposing what is known as a "use tax" on their residents. A use tax is imposed by a state on its own residents, and it says that if you purchase from an out-of-state merchant who is not required to collect your local sales tax, you must fill out a form and pay an amount equal to the sales tax to the state yourself. All states have these. Do you pay your use tax? Remember, everything you say can and will be used against you. This is why we have a Fifth Amendment - so you won't have to answer questions like this. The amount of use tax collected compared to the amount theoretically owed is generally negligible. Some states have become nasty - attempting to subpoena sales records from out-of-state retailers to find which of their citizens owe use taxes, but so far the impact of aggressive use tax enforcement is also negligible.
Amazon in Pitched Battle Over Sales Taxes
Two decades ago, the Supreme Court modified its sales tax ruling saying that while states could not unilaterally demand out-of-state retailers to collect sales taxes on their behalf, the federal government, authorized to regulate interstate commerce under the Constitution's Commerce Clause, could impose such a solution. This immediately struck fear into the hearts of many mail order (this was pre-internet) retailers, but nothing ever came of it. Congress is loathe to impose new taxes, people back home enjoying the benefit of tax-free catalogue and internet shopping.
Ironically, some of the most anti-tax states have been among the first to try to expand sales tax collection. The reason is that such states, to either avoid charging income taxes, or to keep such taxes low, are forced to rely more on sales taxes. As their residents buy more things online, their tax collections suffer. Then, add to that pledges by politicians of "no new taxes," and the dilemma becomes worse. However, they may claim that charging sales tax on internet sales is really enforcing existing tax laws, making this a way to increase tax revenue while still claiming to have added "no new taxes." Perhaps they think people will believe just about anything.
In Texas, where anti-tax fervor runs high, and the mantra says that cutting taxes creates jobs, the state sent Amazon a bill for $289 million in back sales taxes and demanded that it collect such taxes going forward. A few years ago, Amazon opened a warehouse in Texas to be able to cut down on shipping distances. Texas argues that this constitutes nexus; Amazon argues that it does not because the warehouse is owned by a separate corporate entity. In the ultimate irony, Amazon announced that it would shut down its Texas warehouse and layoff all of its employees. In this case, certainly, higher taxes is leading to job losses, though it has the support of a political establishment whose governor threatened to secede from the Union because the federal government is too taxing.
In Tennessee, the previous Governor stated that such a warehouse would not create a taxing "nexus" in return for Amazon's building two warehouses and creating many new jobs in that state. Now, legislation has been introduced to require Amazon to collect Tennessee sales tax. It seems unlikely to pass, and the new Governor has said he will honor his predecessor's agreement, but it is somewhat surprising that such legislation would even be considered in a conservative state such as Tennessee, and with the almost certain to be followed through threat by Amazon to move away if it is adopted.
Several states without Amazon warehouses to attack have gone after Amazon on the basis of affiliate marketers. You may be one, if you post links to Amazon for which you are paid a portion of sales. Under this theory, an affiliate is sort of a part of the company, thereby creating "nexus." Illinois and Arkansas passed such laws, whereupon Amazon canceled its business relationships with their affiliate marketers in those states. So did New York, but Amazon is fighting that one in court rather than severing its New York affiliates. Arkansas may seem an unlikely state for such legislation, but it is home to Wal-Mart, the world's largest retailer, which has to collect sales tax throughout the country, even on its internet sales. It clearly has "nexus" - physical stores within each state. The push for sales tax collection on internet sales comes not only from local governments desperate for more revenue, but from bricks and mortar retailers who find themselves at a competitive disadvantage.
Where this will all lead, including whether someday small, home-based internet booksellers will have to collect sales taxes for all states, is unknown. States and physical retailers have reluctantly put up with cataloguers not charging sales taxes over the years, but now with the rapid growth of internet sales, the pressure mounts. Add to that the recession, and desperate lawmakers needing to raise more revenue while still claiming not to be raising taxes, and we have a volatile mix. Local retailers and states may eventually get their way, maybe not. Of one thing you can be certain. If there is change, you, the consumer, will pay more, not less. Changes will only make your taxes go up, not down.