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“Amazon Tax:” Bad for Business, States, and Holiday Shoppers
November 30, 2010
Although shoppers did not flood the malls as they did on Black Friday, they likely snagged even more deals online yesterday.
Known as Cyber Monday, shoppers took advantage of free shipping offered by virtually all major retailers. As an added bonus, they could shop sales tax free when purchasing from out-of-state online retailers, such as Amazon.com. However, many in state governments want to change that, citing tax fairness and the prospect of increased revenue. In particular, California’s voter elected Board of Equalization has recently considered the measure in hearings.
Unless you live in Kansas, Kentucky, New York, North Dakota, or Washington state, you'll pay no sales tax on most purchases from Amazon. Why? According to the U.S Supreme Court ruling in Quill Corp. v. North Dakota, companies are only required to collect state sales taxes from their customers when they have a physical presence in the state (state-based factories, warehouses, employees, etc. conducting general operations). Amazon currently passes this “physical presence” nexus as it is headquartered in Seattle, Washington and has warehouses and facilities in Kansas, Kentucky, and North Dakota. Only residents in those states pay taxes on Amazon purchases.
As a result, price savings can be especially significant on large Amazon purchases in other states compared to other brick-and-mortar retailers. A recent Slate article by Farhad Manjoo cites these differences, yet insinuates that Amazon skirts tax collection in many states. He claims that Amazon is able to under cut almost all big box chains, like Best Buy and the Apple store.
Many in legislatures across the country see it this way. Thus, many states have tried to get around the Supreme Court ruling by adopting so-called “Amazon taxes.” These require online out-of-state companies with third party in-state advertizing affiliates to collect sales taxes on consumers. The hope is to “level the playing field” among businesses and recoup lost tax revenue. However, the reality is that these taxes serve as trade barriers and cause economic harm. Citing the commerce clause, this is exactly what the Quill ruling hoped to mitigate.
The negative economic side effects can already be seen in states that levy Amazon taxes. Far from leveling the playing field between brick-and-mortar shops and online business, the Amazon tax actually un-levels it. Unlike in-state brick-and-mortar businesses which collect sales tax based only on where the business is located, out-of-state businesses are required to collect sales tax based on where the customer is located. As a result, retailers must track a myriad of state and local sales tax rates and bases, which constantly change.
Also, the projected revenue windfall does not occur. As a matter of fact, revenue drops have occurred in states like Rhode Island and North Carolina. The reason: companies respond to the new tax by simply ending their affiliate programs. Rhode Island saw less tax revenue after Amazon dropped its affiliates, resulting in reduced income and thus income tax collections. Shutting out these companies, states stifled other business growth.
Joseph Henchman of the Tax Foundation notes that department stores, shopping malls, and the Internet have been have all been targeted by brick-and-mortar stores as the reason for their decline. Now, it’s the tax system. Some of this is accurate but brick-and-mortars have other advantages: better locations for immediate purchases and more customer interaction. Simply adding new burdens on competitors is not a productive solution for a state's economic growth or state tax revenue. It simply drives businesses out, leaving consumers with higher prices and fewer choices.
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