Cash-strapped states go online, hoping to tax sales

An Amazon worker in Arizona. The company has called sales taxes on its customers
An Amazon worker in Arizona. The company has called sales taxes on its customers "unconstitutional." (Joshua Lott/bloomberg News)
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By Ylan Q. Mui
Washington Post Staff Writer
Sunday, May 2, 2010

For years, consumers have counted a legal quirk that allows many Internet retailers to forgo charging sales tax as one of the perks of shopping online. But as states face yawning budget gaps, there is a growing movement to lay claim to the billions of dollars lost through the loophole each year.

In most states, the burden is on shoppers to track what they buy online, calculate the sales tax owed and then pay it. In reality, few consumers fess up -- many do not even know such a requirement exists. That will result in $9 billion in unpaid state and local sales taxes this year, according to a study at the University of Tennessee.

Now, states are eyeing those dollars. About a dozen, including Maryland and Virginia, this year have considered legislation that would force online retailers to collect the tax, though only a handful of bills have passed. Some states have even taken the unusual step of asking sites such as Amazon to provide lists of what residents have bought and how much they've spent, sparking concerns over consumer privacy.

Online retailers are vehemently fighting the bills, filing lawsuits and severing business ties in states that have passed sales tax legislation. At stake is not only the small discount that many shoppers enjoy, but the low-price business model that fueled the explosive transformation of Amazon and Overstock.com into giants of the $130 billion e-commerce industry.

Online retailers "want to have the advantage as long as they can," said Mark Scanlan, assistant professor of economics at Stephen F. Austin State University. "They don't have an incentive too much to comply with this."

In a landmark ruling in 1992, the Supreme Court found that retailers are not required to collect sales tax from shoppers unless they have a physical presence in the state where customers live. Initially, this ruling applied mainly to catalogue companies and home-shopping channels on TV. But it also applied to the nascent online shopping industry, and consumers quickly embraced the discount.

In 2008, as the Great Recession gripped the nation, New York passed the first law requiring online retailers to collect sales tax from residents by counting local Web site operators who direct traffic to sites such as Amazon as their physical presence in the state. The law became known as the Amazon tax, and Rhode Island and North Carolina soon passed similar versions.

Amazon retaliated by challenging the law's assertion that local Web site operators are part of its sales team -- the company considers them independent advertisers -- and the case is still winding its way through state courts. In Rhode Island and North Carolina, Amazon ended all contracts with local Web site operators, which one trade group said cut their revenue in half. Amazon has also sent letters threatening similar moves in states that have debated such bills, including Virginia.

Rhode Island and North Carolina "enacted unconstitutional tax collection schemes, and we had little choice but to end our relationships," Amazon spokeswoman Mary Osako said.

That has mobilized people such as Chris Manns, who runs CheapestTextbooks.com out of Williamsburg. He started the price-comparison site about 10 years ago as a side project while he was working as a designer at a local shipyard. Manns gets a percentage of any sales that he directs to sites such as Amazon and Half.com, and the business has grown enough for him to quit the shipyard and hire 10 employees and contractors to manage the site.

Manns said Amazon has no input into his business, and he has none into its. He testified against the Virginia legislation, saying that if the bill passed he -- and his workers -- would have to move to another state. The proposal passed the Senate but was rejected in the House. Sponsor Emmett Hanger said he planned to reintroduce it next session. In Maryland, the bill died in committee.

"I don't really care if you find a way to do it," Manns said of the sales tax. "But you gotta find a different way because this way doesn't make any sense."


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