With the popularity of internet sales increasing every year,
it is time that Congress acts to level the playing field and require state sales
tax collection from online retailers.
Currently, online retailers that do not have a “physical presence”
within a state are not required to collect sales tax for that state, even when
they make sales to residents of the state.
A physical presence typically means a “bricks and mortar” store or
office within the state.
If an online retailer has a physical presence within the
state, they are required to collect sales tax even on purchases made
online. For instance, Target.com
collects sales taxes in Colorado because they have Target stores throughout the
state, whereas Amazon.com does not collect sales tax on their online purchases
made by Colorado consumers. This creates
a competitive disadvantage for retailers that have stores in the states.
In a recent Wall
Street Journal article, Lowe’s president, Scott Mason stated that they have
a 5 percent to 10 percent price disadvantage compared to online retailers as a
result of the sales tax collection inequity.
The result is a competitive disadvantage for retailers that are putting
roots down in the states and are making an economic contribution to local
communities.
If a retailer does not have a presence in the state,
consumers are still required to pay their sales, or “consumer use” tax on their
online purchases. Sales and use tax are
ultimately paid by the consumer and businesses with a local presence are merely
required to collect and remit the sales the tax on behalf of the consumer. When sales tax is not collected by the
retailer, it is still owed by the consumer and should be paid by them directly
to the local taxing entity. However, the
payment of the consumer use tax is rarely enforced.
With online shopping totals topping $200 billion annually,
this loophole for online retailers resulted in more than $23 billion in forgone
state tax revenue nationally. In a time
when budget deficits are stripping services and jobs throughout the states, sacrificing
state tax revenue has a more devastating result than ever before.
The National
Conference of State Legislatures estimates that Colorado lost more than
$352 million last year to uncollected online sales taxes. This amount is 16.9 percent of the budget
deficit that Colorado faced in 2012. Therefore,
if sales tax had been collected, or paid by consumers, Colorado would have had
$352 million more dollars to offset cuts in schools, health care, higher
education and the public infrastructure.
Many states have tried to repair this issue
legislatively. States such as North
Carolina, Rhode Island and New York attempted to force online retailers to
collect sales tax by claiming that their “affiliates” within the state gave the
online retailer a physical presence.
Affiliates are typically small bloggers and online retailers that are
paid for promoting products of large online corporations, such as Amazon.com
and Ebay.com. This effort was somewhat successful
in New York, where Amazon.com has begun to collect sales tax. However, the
result was different in Rhode Island and North Carolina, where instead of
complying with the state laws, online retailers simply fired all of their
in-state affiliates, thus removing their “physical presence” and leaving many
state residents without a job.
In 2009, Colorado took a different approach to enforcing
online sales tax collections. Colorado
passed legislation that would require online retailers to provide an online
sales tax invoice to shoppers residing in Colorado. A copy of this invoice would be sent to the Colorado
Department of Revenue and then Coloradans would have to pay their invoice on
their own, similar to their state income taxes.
Yet Amazon.com was still unhappy.
After unnecessarily firing all of their local affiliates, the online
sales giant challenged the law and won, allowing them to continue to refrain
from collecting or providing an invoice for online sales taxes in Colorado.
Fortunately, these efforts by states have illuminated the problem,
gaining national attention and traction with Congressional leaders. Sen. Lamar Alexander (R-TN) and bipartisan
co-sponsors are working on passing a bill that would give states the authority
to compel online sales tax collection. As
a result, online retailers are beginning to collect sales tax in some
states. Amazon.com has planned
collection in at least 13 states by 2016.
Thus far, Colorado is not one of these states.
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