Amazon’s Multi-State Sales Tax Battles are a Sideshow to the Real National Solution, and the Politicians Know It

3/11/11Follow @curtwoodward

Revenue-hungry state governments are licking their chops. Stuck with declining tax collections and soaring costs for services, they’re chasing Amazon.com around the country in a series of attempts to make it collect sales taxes.

That’s led some to wonder whether this high-tech round of whack-a-mole might be the front edge of a viral political movement that spreads across the country, wiping out tax-free shopping for millions of consumers and dragging down profit margins of Amazon.com and other e-retailers.

Fat chance.

The volley of lawsuits, rhetoric from fired-up tax collectors, and Amazon’s hardball response tactics are certainly entertaining to watch from afar. But any real resolution will almost certainly come from a much more boring, slow-moving effort to get state sales taxes on a common source code, and then change the federal laws.

Here’s why:

—It’s not clear that the newly popular approaches to wringing more sales taxes from Amazon customers are legally enforceable. That means potentially long court battles, such as one under way in New York.

—Amazon has shown no real signs of giving up its fight, even if that means cutting jobs. Some politicians are already knuckling under.

—Others are already working on a comprehensive fix. It’s the realistic vehicle for national online retail taxes, an approach that Amazon has supported, and everyone knows it.

The question here is not whether Amazon and other online retailers should have to pay taxes. It’s whether they have to collect taxes for the government.

In states where a retailer doesn’t have an office, the answer is generally no. The U.S. Supreme Court said so in a 1992 case, ruling that forcing a company to navigate the thousands of different little sales tax districts around the country just for the privilege of being in business was too difficult. Unconstitutionally difficult, in fact, because it would amount to a restriction of interstate commerce—an arena reserved for the feds.

So Amazon has historically collected sales taxes in only a handful of states, including Washington, where its headquarters are based.

Cue the economic meltdown, which has left state budgets in tatters just as more people are trying to get their hands on unemployment benefits, subsidized health care, job retraining, and the like. Given that backdrop, it’s no wonder that more politicians are trying to tap into the stream of taxes that their own residents are dodging when they buy stuff online.

Two approaches have emerged in recent years. New York and a few other states have used Amazon’s marketing tie-ins with other websites to claim that Amazon has a “nexus” in their state and therefore must submit sales tax collections.

In other states that have tried this, Amazon has simply cut off the affiliate programs that were at issue, or at least threatened to. In New York, however, Amazon is fighting the law in court (and collecting sales taxes from New York customers in the meantime).

In Texas, officials tried to grab more tax collections because Amazon had an affiliated shipping center in the state. This argument seems a bit more solid, since it revolves around brick-and-mortar facilities with real people who get an Amazon paycheck. Amazon argues that the shipping centers are not really part of the Amazon retailing business, but instead are sister shipping companies.

When that argument didn’t work in Texas, Amazon pulled out of its distribution center there, leading Texas Gov. Rick Perry to say the state probably messed up. In South Carolina and Tennessee, the company got promises that its shipping warehouses won’t make the retailer subject to collecting sales taxes.

Any lawsuits over these attempts to get more tax money will take a long time to wind their way through the court systems. That could discourage other states from joining the fun.

So what can be done? It’s clearly unfair that some shoppers aren’t paying sales taxes that they’re supposed to—and state efforts to get people to voluntarily fork over the money one at a time are predictably unsuccessful. Did you know there’s a form you’re supposed to fill out?

The long-simmering effort to fix the problem is known as the Streamlined Sales Tax project. This multi-state coordinating board is chock full of lawmakers, government tax analysts and business advisers trying to harmonize sales tax laws around the country, making administration more uniform and practical.

For the engineers at Amazon and other e-retailers, this amounts to converting a bunch of different and conflicting tax systems into one source code that someone could use to develop a tax-collecting program. And that would, in theory, make multistate sales-tax collection easy enough that Congress could change the law and allow the system to take effect.

Amazon didn’t respond to a request for comment in time for my deadline, but the company has looked favorably on this approach. In a letter to a California state senator, Amazon public policy VP Paul Misener called out the Streamlined Sales Tax effort and wrote that “a national resolution, involving tax simplification evenhandedly applied, is the legally permissible path for states to follow.”

Washington state has plenty of people who have been working for a long time on the project, including Russ Brubaker, a senior assistant director at the Washington state Revenue Department. He’s also the No. 2 officer at the national Streamlined Sales Tax group.

Brubaker says the attention being generated by the Amazon lawsuits and disputes isn’t actually harmful to the Streamlined effort—instead, he says, it could make the issue more pressing for the feds to solve.

“All of the efforts are aimed at the same goal which is to require remote sellers to collect taxes that are owed to the states,” Brubaker says. “The only caution I would have is that, when it’s time to turn and devote all the necessary effort to the federal legislation, that folks will need to do that. And I have every confidence that they will.”

Curt Woodward is a senior editor for Xconomy based in Boston. Email: cwoodward@xconomy.com Follow @curtwoodward

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  • http://www.8020results.com Todd (Cloudrocket) Shelton

    Did you know that there are 13,000(!) and rising separate tax jurisdictions in our great nation? And that since government budgets are so broken, rates and tax classifications across jurisdictions change on a daily basis?

    So how does that affect you?

    Depending on where you live, delivering products or services to you could involve as many as five overlapping tax jurisdictions, each with its own forms, filing deadlines, and rates.

    Every one of these jurisdictions has legal authority to compel the business to collect taxes from you as their agent, on the items they choose to tax, at the rates and terms they prescribe. And, of course, legally they place the duty on the business to know and comply with all their stuff.

    That little web business with the really cool product you love? Right now, when you buy, that business has to stop focusing on you to take care of the government paperwork that your purchase just created.

    Think about it–if you want that item, and you bought it in a local shop, you would just pay the tax, right? And let’s be clear, the business doesn’t *pay* the tax–you do. The business collects, reports, and remits the tax as the tax authorities’ agent.

    So it’s not about the money, it’s about the work that business you love has to do to comply with all those tax jurisdictions. Here’s one example that made the news last year:

    In 2010 the Washington state legislature passed a tax on candy (which was not taxable before). The tax only applied to “candy that does not contain flour”. (Presumably flour means food, and food is not taxed in Washington.)

    The state Department of Revenue subsequently inspected some 11,000 candy items and posted a list of 3,000 that were taxable. All retailers were required to (re)categorize, tax and file accordingly.

    A short time later, voters repealed this particular tax, but that’s pretty unusual. In most cases tax categories and rates are handled quietly and administratively, and the dialogue runs between the tax authority and the business.

    Government uses our tax money to do its work–this is how we the people want it, and that’s fine. But we the people need to tell our government that the hidden cost of compliance with over 13,000 tax jurisdictions cuts productivity, slows the recovery, and makes people angry.

    The Streamlined Sales Tax Initiative (http://www.streamlinedsalestax.org/) is a state-level group working to create a national solution. Probably Congress will need to get involved, too.

    Tell your legislators and congressional representatives to fix this problem and make it easy, simple, and cheap for business to collect the taxes that we the people voted for.

    Here’s what you’ll get:

    That wonderful local shop (with its mail order internet business), and that great web site that you love (that also might have a shop somewhere else) can stay 100% focused on *you*.

    And that’s what’s really important, right?

  • David Miller

    The SSTI is still problematic because implementing it means an expensive trip to your software vendor to rewrite your shopping cart. I’m not generally in favor of VAT or national sales taxes, but if SSTI came up with a national single rate approach that would be ideal.

    At a minimum, online sellers should have one place to electronically file their sales taxes if other jurisdictions are going to get in the mix. It’s bad enough figuring it out on a state-by-state basis.

    David Miller

  • http://www.xconomy.com/author/cwoodward/ Curt Woodward

    @David, interesting point re: a VAT-type system. I’d say a single- or very few-rate approach is not the kind of thing the SST project could pull off because of state sovereignty.
    Of course the sub-categories of local and regional taxes matter there too: We’ve got more than 350 individual taxing districts in Washington state.

  • http://taxcloud.net Beatrice Vaccaro

    Thank you for your thoughtful article. When the Supreme Court ruled on this matter in 1967 and 1992 it was too difficult for a remote seller to keep track of the thousands of jurisdictions – which is why they were exempted from the obligation to collect. Moving forward to today, large internet retailers easily manage thousands of items for sale at any given moment, and even the smallest internet retailer can calculate accurate shipping rates to every corner of the country in a blink of an eye – it is no longer too difficult to keep track of a few thousand local jurisdictions.
    Technology makes it easy for anyone to open a Web business, manage inventories, use target marketing, calculate shipping etc. Technology has solved this problem also. My company, FedTax.net, offers a service (called TaxCloud) that enables merchants to accurately calculate local sales tax. The service is completely free to merchants.
    It is better that Congress address this issue so that all businesses collect the correct tax. Until then, more and more states are going to be attempting on their own to collect these taxes, which will increase complexity and result in continued litigation.

  • Pingback: “Amazon’s multi-state sales tax battles are a sideshow to the real national solution…” « blog.FedTax.net

  • Ray Kumar

    Amazon does collect sales tax on sales by its marketplace merchant, Target and many others (complete list at the end), so evidently cost and complexity is not an issue for them to do the same for sales by itself.

    The Streamlined Sales Tax Agreement makes it possible for even small merchants to comply easily and for FREE. The Federal Tax Authority, a private company also known as TaxCloud.net, launched last year its TaxCloud software-as-a-service application that it plans to offer SST-participating merchants for NO CHARGE.

    “A merchant using TaxCloud doesn’t have to know anything about sales taxes other than where it’s shipping from, where the customer’s destination is, and the class of goods the customer is buying,” says R. David Campbell, co-founder and CEO of TaxCloud.net. He says most retailers can sign up for TaxCloud and begin using it in 20 minutes.

    Here is a good write-up in Slate on this subject.
    “Every Day’s a Tax Holiday: How Amazon.com undersells Best Buy, the Apple store, and almost everybody else.”
    http://www.slate.com/id/2275552/

    Here is a partial list of merchants selling items at Amazon.com for which it collects sales tax.
    Target.com: All states other than VT
    Harper Collins Publishers, LLC: All States
    Penguin Group (USA) Inc: All States
    Electronic Arts, Inc.: All States except for AK, ID, ME, MS, ND, NM, SD, VT, WV, and WY
    New York Times, Inc.: AL, DC, KY, and NY
    Hachette Digital, Inc.: AL, AZ, CO, CT, DC, HI, ID, IN, KY, LA, ME, MS, NC, NE, NJ, NM, SD, TN, TX, UT, VT, WA, WI and WY
    Simon & Schuster Digital Sales, Inc.: All states other than AK, DE, MT, NH, and OR
    Macmillan: AZ, CO, CT, DC, HI, IN, KY, ME, MS, NC, NE, NJ, NM, SD, TN, TX, UT, VT, WA, WI and WY
    Dow Jones & Company, Inc: AZ, CT, DC, HI, ID, KY, NC, SD, and TX
    Zondervan Corporation LLC: CA, CO, FL, GA, IA, IL, IN, LA, MA, MD, MI, MO, NC, NV, OH, PA, SC, TX and WA

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