Cash-strapped states go online, hoping to tax sales

By Ylan Q. Mui
Washington Post Staff Writer
Sunday, May 2, 2010; G01

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."

The newest iteration of the tax law, passed this year in Colorado, forces online retailers to track sales to state residents through local Web site operators and send the shoppers an invoice each year. Amazon said it would not comply and again canceled relationships with local Web site operators.

On the privacy front, Amazon last month filed a lawsuit against North Carolina after it requested details about products bought by residents as far back as 2003 to help determine the sales tax the state lost. North Carolina has since said that it wants to know only the total amount bought rather than an itemized list.

"Consumers have a reasonable expectation of privacy and a First Amendment right to read, hear or view a broad range of popular and unpopular expressive materials without their choices being subjected to unnecessary government scrutiny," said Jennifer Rudinger, executive director of the American Civil Liberties Union of North Carolina. The state's "demands threaten to have a major chilling effect on future consumers' expressive choices."

Some online retailers have agreed to collect sales tax after working with states and industry trade groups on the issue. Other retail Web sites, such as Wal-Mart and Best Buy, are required to collect sales tax because they have brick-and-mortar stores in every state. The Retail Industry Leaders Association, a trade group, said its members are concerned that online-only retailers such as Amazon have an unfair advantage.

"We think they really will go to extreme lengths to salvage their business model, which is in fact exploiting this loophole," said Joe Rinzel, RILA's vice president for state government affairs.

Not all retailers agree that the recent rash of legislation is the best way to force sites to collect the tax. The National Retail Federation, another industry trade group, has worked for a decade to persuade states to simplify their tax codes and make it easier for online retailers to collect sales tax. So far, 23 states have signed on to the project.

"While states are strapped for cash, there is no shortcut to getting uncollected sales-tax revenue," said Maureen Riehl, vice president of government and industry relations at the NRF.

Amazon said it supports the goals of the project to streamline sales taxes.

"We are not opposed to collecting sales tax within a constitutionally permissible system applied even-handedly," Osako said.

Scanlan, the economics professor, said online shopping has become such an integral part of peoples lives that he doesn't think a tax will slow their shopping. He said studies show that the maximum decline in sales to be 6 percent after imposing the levy; his research suggests the impact could be close to zero in states with low sales tax rates.

Bethesda resident Jamie Ratner, 32, said she makes online purchases about three times a week. With two children ages 1 and 2, Ratner said she appreciates the convenience of shopping from home. She orders groceries online for home delivery, buys supplies for her fledging business and visits Amazon almost daily. Ratner said she occasionally notices whether sites charge a sales tax, but it doesn't stop her from completing the purchase.

"By that point I'm like, 'Okay, I'm ready to pull the trigger,' " she said. "You've already invested enough time to getting where you're at. It's not worth it."

Both the NRF and RILA have lobbied extensively for federal legislation that would require companies to collect sales tax in states that have simplified their tax codes, but the bill has repeatedly stalled in committee. Still, whether through legislation, litigation or other means, Scanlan said consumers' free ride won't last forever.

"This is something that I think eventually they're going to have to succumb to and change," he said.

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