Published October 17, 2011
Years ago, the publisher of The Yellow Pages ran TV commercials with a catchy jingle that encouraged us to “Let your fingers do the walking.” (If you don’t remember this, you probably don’t have no clue what an 8-track is, either.) The publisher was pushing that consumers could save a lot of time hunting for a particular item or service if they began by looking for a potential merchant in the yellow-paged phonebook of commercial listings.
Ironically, more than 30 years later, more of us than ever before have discovered the convenience of “finger shopping” online. In addition to 24/7 accessibility, doorstep delivery, immensely wider choices, and the ability to compare both availability and price in an instant, another perk of e-commerce--at least for some--has been the lack of any sales tax added to purchases.
But hang on to your wallet, because that’s about to change. “It’s only a matter of time before online companies start collecting sales tax,” predicts Dan Schibley, senior state tax analyst with CCH. “States are desperate for the money.”
The amount involved is enormous. According to J.W. Davis, press spokesperson for Arkansas Congressman Steve Womack, his state will lose more than half a billion dollars in revenue in lost online sales tax revenue from 2007 through 2012. In California, the amount is $8.7 billlion, over the same time period. Michigan estimates losing $412 million in 2010 alone.
Internet sales are not the only source of lost sales tax revenue to states. By next year, nationwide, e-commerce sales are projected to hit $268 billion. Catalog and mail order sales are estimated to be at least as large. So, we’re talking about more than half trillion dollars in sales made outside the consumer’s state of residence. “It’s killing local businesses,” says Davis. He claims consumers are scouting out products they want in brick-and-mortar stores using their showroom and sales staff and then buying the items online where the price might be hundreds of dollars less, especially when you include the savings on no sales tax.
Few consumers know (or admit to knowing) that unless you live in a state that does not impose sales tax, you are legally obligated to report your purchases and pay the tax anyway. Technically, it’s called a “use tax.” As Michigan’s website explains, it “might be more aptly described as a remote sales tax” because it is owed on sales made from a merchant located outside the state. (1) (You’re not expected to pay sales tax twice. If you visited the Grand Canyon this summer and paid Arizona sales tax on a purchase you made, you do not owe more sales tax to your home state.)
As one of the largest web-based retailers, Amazon.com has been both the poster child as well as the most vocal opponent of the sales tax movement. Not because it thinks consumers do not owe their states the money, it objects to the complexity and cost associated with dealing with a hodge-podge of regulations and tax rates among 50 states and local municipalities.
In fact, on its website, Amazon acknowledges that, “Companies selling over the Internet… are generally required to collect taxes where they have a physical selling presence.” However, it maintains that “if they do not have such a presence, they are not required to collect sales taxes.” (2)
A number of states have passed or are considering so-called “Amazon Tax” legislation in an effort to force e-tailers to collect sales tax, whether or not they have an actual business operating in the state.
Amazon has led the fight against legislation like this arguing that- among other things- only Congress has the authority to regulate interstate commerce. In other cases, it retaliated by closing its warehouses and other operations to eliminate its “in-state” presence )and thousands of jobs). Although it continues to have an operation in New York, it is fighting the issue in court. After California’s legislature passed a law requiring internet retailers to collect sales tax, Amazon spent an estimated $5.3 million to collect enough signatures to get a measure on the ballot aimed at repealing the law.
However, this summer Amazon came out in support of a bill introduced in the Senate because it would finally standardize the process nationwide. In late September, it reached an agreement with California that will require Amazon to collect sales tax by September 15, 2012 unless Congress passes a law covering all the states.
In a rare show of bipartisanship, last week Rep. Womack, a republican, and Congresswoman Jackie Speier, a democrat from California, co-sponsored a bill on the House side. The Marketplace Equity Act of 2011 (MEA) would give states “the ability to collect sales and use taxes from all online vendors, including those that do not have a physical presence in the state.”
MEA gives states greater flexibility that previous measures, allowing them to choose one of three ways for the tax to be calculated. In addition, each state must provide software for an online vendor to use. In addition, internet-based businesses must be able to report sales on a single tax return. Smaller e-tailers- those with annual revenues of less than $100,000 in a state or less than $1 million nationwide- would be exempt.
CCH’s Schibley emphasizes “there’s no federal money involved.” In Davis’ words, “It’s about states rights. It empowers states to get the sales tax that they’re missing out on.” In other words, all Congress would be doing is giving states the power to choose how to handle the sales tax collection issue. Davis is adamant that MEA is not aimed at getting consumers to shop locally instead of via the Internet, but, instead, about “making it a level play field.” And, although it was just introduced, Davis says Rep. Womack’s office has been “getting some pretty good feedback.”
None the less, CCH’s Schibley expects the measure is “not likely to get passed.” At least not any time soon. Perhaps because we’re heading into an election year and no one wants to be accused of raising taxes. (Which wouldn’t be true, but, well, you know how things get twisted in a political campaign.) Still, if not MEA, Schibley is convinced that some version of a so-called “Amazon tax” law will eventually be enacted.
In the words of Davis, “It’s not the most popular thing to do, but it’s the right thing.”
1. Even an item delivered electronically via the internet, such as a book or music download, is subject to sales tax.
2. In addition to New York State, Amazon or its subsidiaries have physical operations in Kansas, Kentucky, North Dakota and Washington.
Ms. Buckner is a Retirement and Financial Planning Specialist and an instructor in Franklin Templeton Investments' global Academy. The views expressed in this article are only those of Ms. Buckner or the individual commentator identified therein, and are not necessarily the views of Franklin Templeton Investments, which has not reviewed, and is not responsible for, the content.
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