The ABA Takes On Amazon
An ad from the Alliance for Main Street Fairness (which includes the ABA).
In June, we reported on a major sales tax battle taking place in the hinterlands between the world's largest online bookseller, Amazon.com, and various American states. The ABA (American Booksellers Association) has weighed in heavily on this issue, and it strongly opposes the position taken by Amazon. The ABA is an association of independent, storefront booksellers founded in 1900. The issue is whether Amazon, and other online retailers, should be required to collect sales tax in states where they do not have a physical presence. This is no small issue, with estimates well into the billions annually said to be at stake. On one side are revenue-starved states and bricks and mortar retailers, ranging from small independents such as those represented by the ABA, to large chains like Wal-Mart and Target; on the other are online retailers such as Amazon and Overstock.com and some anti-tax groups.
We all know the issue. When you buy at a store, you pay your state and local sales tax (if there is one). When you buy online, unless that online retailer has a store or some physical presence in your state, you do not. Naturally, local retailers see that as a competitive disadvantage. They have to charge more to cover the tax, encouraging consumers to buy from the out of state online retailer instead. They want a "level playing field," that is, they want online retailers to be compelled to collect local sales taxes just as they must do.
Electronic retailers object to having to collect sales tax primarily on the grounds of complexity. Forty-five states impose sales taxes, each at its own rate. But that is not all. Hundreds of municipalities also charge sales taxes at varying rates. Then, add to that each state has its own list of items that are and are not subject to sales tax. The permutations are in the thousands. The online retailer must compute and charge the correct amount on those items subject to tax for each jurisdiction and then make payments to at least 45 separate taxing authorities. Meanwhile, the local store charges just one rate on one set of taxable items.
States have long wanted mail order (and now online) retailers to collect their sales taxes. For them, it's a revenue, rather than a fairness issue. However, the Supreme Court has struck down state attempts to force out-of-state retailers to collect taxes on the grounds that the task of collecting varying sales taxes puts an unacceptable burden on interstate commerce, constitutionally the purview of the federal government. So, years ago, it said that an out-of-state retailer could only be compelled to collect a state's sales tax if it had a "nexus" with that state. "Nexus" has generally been considered some sort of physical presence within the state, such as a store. That is why a Wal-Mart online will charge you sales tax but Amazon won't. Wal-Mart has a store in your state; Amazon does not.
In 1992, the Supreme Court (in the Quill case) modified its earlier decision to open one more option for states to collect sales tax. Since interstate commerce is a federal responsibility, the Court said that the federal government could compel internet retailers to collect state sales taxes, even if the states themselves could not. So far, the federal government has declined this invitation.
For years, this issue stayed on the backburner, politicians loathe to push for taxing internet purchases as taxes are not popular with the public. "Main Street" may have felt it was treated unfairly, but consumers are glad for any break they can get. However, with the recent severe recession, coupled with decreasing federal aid, states have been desperate to find new sources of revenue. They are looking at these billions of dollars in lost sales tax revenue and trying to find a way to collect them.
The most obvious answer, short of convincing Congress to help, is to uncover innovative ways of finding "nexus" between the internet company and their state. Warehouses, and local "agents," have topped the list of new forms of claimed "nexus."
Enter Amazon. No one is a bigger online retailer, and no one has objected more strenuously to efforts to require the collection of sales taxes on internet purchases. Amazon plays hardball. Amazon, through a separate corporation, controlled a warehouse in Texas, opened to reduce shipping costs. After a couple of years, Texas yelled "nexus" and sent Amazon a bill. Amazon shuttered its Texas warehouse and laid off its local employees. Nexus no more. Amazon demanded the Governor of Tennessee agree not to deem warehouses to be a "nexus" as a precondition to opening one in that state.
The ABA Takes On Amazon
The American Booksellers Association is taking on Amazon.
Meanwhile, other states with less obvious connections reached for new ways of finding "nexus." New York, California, and Illinois, among others, deemed local website owners who collect commissions from Amazon for sending customers their way to be agents of Amazon. In-state agents equal nexus in their opinion. Amazon responded by cutting off relations with those "agents," except in New York, where they are mounting a legal challenge.
In California, a law was passed requiring online retailers to collect sales tax. Amazon declared the law to be unconstitutional, but then took the extraordinary step of filing a proposed voter referendum with the Attorney General to have the law repealed. If they can gather enough signatures, the proposition will appear on an election ballot next year. Californians have a history of supporting anti-tax referendums.
ABA CEO Oren Teicher issued a statement in response saying, "Having long behaved as if tax laws don’t apply to them, Amazon.com has now announced its intention to spend millions of dollars in an effort to get a tax-evasion referendum on the ballot in California. The time has come for Amazon.com to collect and remit the required sales tax - just like every other [40,000] California retailer."
Meanwhile, at the Federal level, a bill has been introduced entitled the Main Street Fairness Act, sponsored by Dick Durbin (D-IL) in the Senate and William Delahunt (D-MA) in the House. It is designed to take advantage of the opening in the Quill case to allow the federal government to require online merchants to collect sales taxes. The Main Street Fairness Act would require all merchants to collect sales tax from customers in participating states. Essentially, states could participate by agreeing to a number of conditions designed to make assessment and collection of the tax easier for online merchants. It would set up a "centralized, one-stop, multistate registration system" so that retailers would not have to deal separately with 45 taxing authorities. States would have to provide uniform definitions for products so as to reduce confusion over what is taxable, and certified taxing software would be made available on which retailers could legally rely. Uniform methods for filing returns would also be mandated, with local taxes collected at the state level. States would have to provide reasonable compensation for the costs of collecting and remitting taxes. There would also be a "small seller exception" to the requirement to collect sales taxes, but what constitutes a "small seller" is not defined.
In arguing for the bill, Senator Durbin stated, "Why should out-of-state companies that sell their products online have an unfair advantage over Main Street bricks-and-mortar businesses?" He went on to say, "The Main Street Fairness Act doesn’t ask anyone to pay a single penny more in taxes." Technically, the Senator is correct. When you purchase a product online from an out of state vendor, you are supposed to pay a "use tax" on it to your state taxing authority. The use tax is the exact same amount as the sales tax. However, in reality, few people do so. The truth is the Main Street Fairness Act is simply about collecting taxes already due, not inflicting a new one, but use tax evasion, whether knowingly or not, is so widespread that many people think of it as a new tax. Durbin estimated that between 2009 and 2012, states would lose as much as $37 billion in uncollected sales/use taxes.
We asked ABA CEO Oren Teicher whether the complexity objection to online sales tax collection was compelling. He was not buying into the argument, particularly with respect to Amazon. He noted that there is compliance software currently available, such as OneSource and AvaTax, and other vendors complying with the Streamlined Sales and Use Tax Agreement (the blueprint for the Main Street Fairness Act). He added, "And while a remote retailer like Amazon.com will tell you that complying with the myriad taxing jurisdictions is simply too complicated for them, Amazon.com itself once provided an integrated e-commerce sales and use tax system for companies like Target, which has stores in every state. So a company like Amazon.com already has the software in place. The notion that complying with the law to collect sales taxes is an undue burden on interstate commerce is simply no longer the case."
The ABA Takes On Amazon
The Main Street Fairness Act has been endorsed by the ABA.
Since many ABA bookstores also have websites, we asked Mr. Teicher whether they supported the ABA position. He responded, "I would guess that nearly all of our members strongly support sales tax fairness, which just shows what kind of impact sales tax inequity has had on independent bookstores over the years. Literally hundreds of ABA member booksellers have been actively engaged in this fight, some by simply communicating with their legislators, but many by actually testifying before legislative committees. Our members collect and remit sales tax in states where they have nexus already, so this issue for them is a no-brainer. It's all about leveling the playing field."
Mr. Teicher expressed the belief that many people are unaware that they are supposed to pay a sales/use tax when they purchase from a merchant like Amazon. "We know for a fact that many people do not understand that, when you purchase a product out-of-state that you owe use tax on it, so they believe they're buying duty-free. As online shopping has grown, this has further eroded sales at bricks-and-mortar stores. I believe that a significantly growing portion of online shoppers are buying online because they either do not understand use tax laws or know they are hard to enforce."
As to how great the loss is to "Main Street," Mr. Teicher was unaware of any specific studies, but pointed out, "Anecdotally, we hear from booksellers, and indeed from retailers in other markets, that people will enter their stores to find out about the next greatest book or item, and then declare that they will go and buy it online to avoid paying sales tax, sometime even using their smart phones to make the purchase in the aisle of the bricks-and-mortar store." He noted statistics showing the rapid increase in online sales as evidence of sales being lost by local retailers. Mr. Teicher also pointed to Amazon's desire to overturn California's remote sales tax law as "yet another indication as to how important that sales tax advantage over in-state retailers really is."
Finally, we inquired as to what legal strategy was most likely to help the ABA members' cause. Mr. Teicher responded that they have always felt that a federal solution, such as the Main Street Fairness Act, would be the best way to resolve the issue, but "it has been difficult to generate sufficient support in Congress." However, he also considers the current definition of "nexus" sufficient for states to require sales tax collection by out-of-state retailers. He believes such things as warehouses, offices of affiliated companies, and online affiliates ("by anyone's definition that's a sales agent") are clearly examples of nexus. Clarifying state laws, or federal acts are welcome, but Mr. Teicher believes the law already supports the ABA's side of the argument.
Mr. Teicher concluded, "This has been a long and protracted fight, but we are making progress. Legislation has been passed in more states, and editorials calling for sales tax equity have appeared in dozens of newspapers across the country, including in Amazon's own hometown, The Seattle Times."