Web Sales Tax Debate Flares Again

Would you prefer to save $40 a year in sales tax on purchases you made on the Web, or watch your house burn down when the fire department takes 30 minutes to get there? That may sound like hyperbole, but for Internet shoppers in California and other hard-pressed states it's a real issue. Cities and states are losing billions of dollars annually in lost sales taxes, local merchants are being squeezed out of business and all of us are seeing the erosion of government services we once took for granted.

You can't blame all of that on Internet merchants who don't collect sales tax, of course. But as buyers flock to the Internet for convenience, and to avoid paying sales taxes that are approaching 10 percent in some areas, an important source of revenue is going untapped.

The amount is staggering. Uncollected use taxes (a use tax is pretty much the equivalent of a sales tax) for the six-year period ending in 2012 will range from $52 billion to $56 billion nationally, according to a 2009 study by economists at the University of Tennessee. New York City alone will lose at least $390.6 million in 2012; Chicago $229 million, they predict.

That huge black hole hasn't gone unnoticed, and a number of states, including North Carolina, New York, Colorado and Rhode Island, are actively working to change the rules. More states are considering similar action, and don't think the Internet Tax Freedom Act forbids that--it doesn't.

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On the other side are the big Internet retailers, such as Amazon, which has fought hard to maintain a status quo that gives them a marked advantage over local brick-and-mortar merchants. Amazon, the largest and best known Web retailer, has fought efforts to collect sales tax from customers. The company argues that the crazy quilt of taxing jurisdictions--there are approximately 8,500 in the U.S.--makes that impractical.

I don't buy it. An industry that can deliver tailored ads to buyers in a fraction of a second could surely solve whatever technical problems exist. Indeed, Reed Hastings, the chief executive of Netflix, told the New York Times that, "We collect and provide to each of the states the correct sales tax. There are vendors that specialize in this (we use Vertex). It's not very hard."

Amazon is far from the only Web retailer opposing changes in sales taxes charges and collections, but its size and influence make it a leader of the industry. I tried to speak to the company for this story, but my messages were not answered.

Is It Fair Not to Pay?

I don't enjoy paying taxes any more than the next guy. But I want my local government to work, and like it or not, services have to be paid for.

There's another argument in favor of taxing Internet sales as well--fairness. Why should a bookstore or kitchenware merchant in Silicon Valley lose business simply because a huge company that doesn't choose to have a physical presence in California can charge 9.25 percent (the sales tax in San Mateo County) less?

What's more, giving tax breaks to people who have credit cards and shop online is unfair to those who can't. In fact, sales taxes are regressive since everyone pays the same rate regardless of income. So taxing non-Internet users, who tend to be older and poorer than the Web savvy, becomes doubly regressive, says Michael Mazerov, a senior fellow at the non-partisan Center on Budget and Policy Priorities in Washington, D.C., who has written extensively about the sales tax issue.

Although many people think that the Internet Tax Freedom Act stands in the way of collecting sales taxes on Web-purchased items, it doesn't. The major thrust of the law is to forbid states from imposing a sales tax on fees consumers pay to connect to the Internet. It also stops states from imposing a sales tax on items sold via the Internet that aren't taxed in brick and mortar stores, an unlikely form of discrimination.

What does stop states is a 1992 ruling by the U.S. Supreme Court that they could not order retailers who don't have a physical presence in a state to collect sales tax. Back in 1992, that really meant catalogue merchants, but by extension, it applies to Web retailers as well. However, there's nothing in the decision (Quill v. North Dakota) that forbids states from ordering buyers to pay the sales tax, says Mazerov. And it doesn't stop states from taxing a company like Amazon that has a brick and mortar affiliate within their borders.

Amazon affiliates aren't those third-party sellers on its Web site; they are typically companies that have an Amazon ad on their own Web site. When a consumer clicks on the ad and goes to Amazon to make a purchase, the affiliate gets a cut of the revenue.

North Carolina and Rhode Island imposed a sales tax on that basis, and Amazon retaliated by dropping affiliates in those states. New York passed a similar law, but Amazon, apparently hoping to challenge it in court, has not pulled the plug on the affiliates.

California now asks taxpayers to disclose how much they've spent on items purchased on the Internet that would have been taxable if purchased in state. I haven't seen any statistics on this one, but I'd guess that compliance rates are rather low.

Colorado, though, has taken a similar approach, but added teeth. A law passed earlier this year orders Web merchants to tell customers that they owe a use tax on items purchased, and far more importantly, mandates that the merchants give the state an end-of-year accounting of what individual Colorado residents spent on their site. If the law withstands an expected court challenge, watch for others states to follow.

The $40 I mentioned? That's the amount that the average California household would have paid in sales tax for a whole year if they reported Internet purchases, says the state Board of Equalization. That $40 may not mean much to you, but add it up and it cost California about $1 billion in lost revenue that would have paid for things like more fire trucks.

San Francisco journalist Bill Snyder writes frequently about business and technology. He welcomes your comments and suggestions. Reach him at bill.snyder@sbcglobal.net.

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