Should you pay sales taxes on Internet purchases?

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.

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Categories: Washington

About the Author

Jay Evensen

Jay Evensen is the Senior Editorial Columnist for the Deseret News. He has 32 years of journalism experience covering politics and a variety of other assignments at news organizations ranging from United Press International in New York City to the Las Vegas Review-Journal and the Deseret News, where he has worked since 1986. During that time, he has won numerous local, regional and national awards. Most recently, he was given the Cameron Duncan Media Award, given annually in Washington, D.C., by the advocacy group RESULTS, to the journalist judged to have done the most to further the cause of the world's poorest people.

4 comments

  1. Sten wilson

    A sale is a sale. Sales/use tax has been the honorable obligation of the consumer in most states since 1935. This is in no way a new tax. Bipartisan legislation to simplify existing tax schemes benefiting all businesses, local governments and consumers is excellent, much needed and long overdue. Whether tennis balls are bought online or locally they are taxable in the jurisdiction of use no matter their origin or place of production. All retailers whether online, brick and mortar, or catalogue should be grateful to their consumers doing everything possible ensuring the highest quality product, fairest price, highest level of customer service including the simple collection and remittance of sales tax due. Removing the pesky task of use tax tracking and remittance from individual returns, and returning sales and use tax proceeds back to their consumers’ jurisdictions funding education, local medicare, infrastructure and so much more should be a top priority of all businesses.

    States also strongly desire to undue harmful tax schemes and and increases resulting from their constituents tax evasion over the past years. Higher property taxes are forcing rent increases challenging families ability to stay in homes. West Virginia favors eliminating existing harmful tax on groceries favoring being enabled to efficiently collect use tax already due. Other states wish to remove harmful estates taxes. Tennessee has no desire to impose an income tax on residents, but may have to as local businesses close, jobs are lost and sales and use tax continue to be evaded by residents and uncollected by Internet merchants. Connecticut residents are now enduring the highest tax increase in State history to compensate for evaded sales and use tax revenue.

    Technology freely available on the Internet makes tax processing simpler than processing shipping for any business. Getting past reactive sentiment realizing progressive action (Legislation Enabling States’ rights) will benefit consumers, businesses and governments seems to be largest hurdle.

    I strongly support and urge Congress to immediately pass S.1832 the Marketplace Fairness Act, and ask that all state legislators do the same.

    Cite as: 504 U. S. 298 (1992) 333
    Opinion of White, J.

    Although Congress can and should address itself to this
    area of law, we should not adhere to a decision, however right
    it was at the time, that by reason of later cases and economic
    reality can no longer be rationally justified. The Commerce
    Clause aspect of Bellas Hess, along with its due process holding, should be overruled.

  2. Steve Wasserbaech

    The article doesn’t mention the significant fact that Utah *already* requires its residents to pay sales tax (well, it’s called “use tax”) on internet purchases.

    From the Utah State Tax Commission web site:
    “Many people believe they don’t have to pay sales tax on purchases made on the Internet or through a catalog. This is incorrect. If you purchase online or through a mail order from an out-of-state business, you must still pay Utah sales tax. If the tax was not paid to the business at the time of purchase, you must pay it with your Utah individual income tax return.

    “This sales tax that you pay directly to the Tax Commission is called “use tax” and is the same rate as the sales tax you pay in your city or county.”

    I am curious to know what fraction of Utah taxpayers comply with this requirement. I get the feeling that little can be done to identify violators, so basically this is a voluntary tax, an extremely unsatisfactory arrangement to say the least. I would be very happy if sales tax were collected by online retailers, so I wouldn’t need to track my purchases and so I could be assured that all of my fellow Utahns are participating on an equal basis.

    On the other hand, I don’t understand how the collection of use tax by the state can be reconciled with this information from the article:
    “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.”

    Does anyone know?

  3. Eric Grimm

    Requiring Internet-only monopolists to collect and remit sales tax like other retailers is not a new tax. It is only leveling the playing field for local businesses who do pay local taxes. These taxes support local public services (parks, fire safety, police, etc.) and local jobs. These are the companies that support your local youth sports and community events. To compete against local small business with unfair tax policies is not only un-American, its killing local economies. Why can’t a multi-billion dollar company pay its fair share locally?

    The rationale behind the Supreme Court decision that established nexus was not about taxation, it was to avoid complicating interstate commerce. Pending U.S. legislation would resolve that and give local businesses a fair shake.

    • m. walsh

      “Requiring Internet-only monopolists to collect and remit sales tax like other retailers is not a new tax”

      And if the online seller is not a “monopolist”??

      To be fair, any retailer that sells online should be required to collect the sales tax mandated in the 45 states.

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