A movement is afoot in Congress to make it easier for all states to require online retailers to collect sales taxes from their residents who shop online. This is creating a split between conservatives who want to hold the line on all new taxes during poor economic times and Republicans who think the idea of collecting taxes from purchases goes to the heart of states’ rights.
If you buy from a local store, your state will require you to pay a tax based on the amount of the purchase price, unless you live in one of the few states that has no sales tax. The idea is that government has a right to collect the money it needs to provide basic services and protections to that store, including police and fire, as well as other services such as schools, libraries, etc., that indirectly enhance a state’s business climate.
But what about those online purchases that take up so much of the workday these days?
A U.S. Supreme Court ruling in 1992 held that states can’t charge sales tax when people buy things from a store that has no physical presence in that state. In other words, if there’s nothing to protect, the state has no interest in getting a piece of the transaction.
So, what’s a state to do when it starts losing sales tax revenue because people are buying from Amazon and Amazon doesn’t have a warehouse within its borders?
There’s more than one answer to that question. This “Fiscal Fact” paper from the Tax Foundation in Washington says some states have passed laws that say they can tax transactions if the company provies any commissions to residents who refer potential customers and if sales from those referrals total more than $10,000 a year.
Amazon responded to some of these by ending its referral, or affiliate programs in those states. The Tax Foundation says these states appear to have actually lost money in the deal.
In other states, such as California, cities are making deals with Amazon to provide kick-backs, of sorts, for some of the taxes collected if Amazon will agree to build a warehouse there. (Read this story from the Sacramento Bee.)
Meanwhile, this story from The Hill outlines the fight in Congress over allowing states greater leeway to tax. The bottom line is, as with just about everything else, Congress won’t do anything on this until the election.
I’m sympathetic to the fairness issue. Local stores with actual brick-and-mortar buildings have to charge sales taxes and still try to compete with online retailers. But when you add in shipping, the online purchases aren’t necessarily a huge bargain. Meanwhile, savvy shoppers have all kinds of apps and web sites to help them make informed decisions about price.
The real issue is that the sales tax model is broken. Governments should try to find some other, more fair way to fund what they do.