Wednesday, February 23, 2011

Billion Dollar Boondoggle — How Online Retailers Avoid Collecting Sales Tax and What Can Be Done About It

Next year, states will collectively lose out on approximately $11.4 billion in sales taxes on goods sold via the internet. That figure, published in a 2009 study by the University of Tennessee, should have most state lawmakers gnashing their teeth as they struggle to balance their state budgets. The inability of states to collect sales taxes on most internet sales stems from a 1992 Supreme Court case — Quill Corp. v. North Dakota — that requires a business to have a physical presence in a state in order for it to be required to collect sales taxes. With e-commerce making up a growing percentage of sales, states will continue to see a big hole in their sales tax receipts as internet transactions continue to rise.

Recognizing this situation, New York passed a law in 2008 (dubbed the Amazon Law) that compels companies who operate affiliate programs within its borders to collect sales taxes. Affiliates — such as newspapers, bloggers, and other companies with a web presence — receive commission for posting links on their websites that viewers click to access online retailers’ websites. If online retailers generate more than $10,000 in yearly sales through these affiliates, then the Amazon Law requires them to collect taxes on all of their sales, not just the $10,000 generated through the affiliates. So far, this law has resulted in tens of millions of sales tax revenue.

The benefits of such legislation don’t stop with sales tax revenue, either. As the prices for online products adjust to reflect the additional tax, local bricks-and-mortar enterprises enjoy a boost to their competitiveness. Goodbye, price advantage for Washington-based Amazon; hello, normal prices at Minnesota-based Majors and Quinn. Suddenly your prices seem . . . equal. Furthermore, because higher-income earners tend to comprise a higher proportion of online buyers, the regressiveness of the sales tax levels out a bit, as their newly generated sales tax revenue starts paying for many of the services provided by state and local government.

1 comment:

  1. Very interesting. This sheds light on a topic often overlooked.