Friday, August 12, 2011

The Internet Sales Tax War...

On July 1st, a new law went into effect in California imposing a sales tax on Internet purchases. From online retailers like, we've grown accustomed to not having to pay any sales taxes, but after years of budget deficits and governments increasingly desperate for new sources of revenue, is the time now ripe for an Internet sales tax to be imposed?

Lots of states apparently think so and are attempting to do just that. However, the question is whether states can force out-of-state merchants to collect sales tax on purchases by in-state residents.

The Supreme Court ruled in 1992 that the answer was "No" - that states cannot force retailers without an in-state presence, or "nexus", to collect sales tax. As The Economist notes, the Court's justification was that America has over 8,000 different sales tax jurisdictions that are "constantly changing their rules and are not even aligned with zip codes". Requiring online retailers to collect a different sales tax rate for each purchase depending on where that customer lives would be an enormous burden and would chill interstate commerce with disastrous consequences.

The problem is especially acute with Amazon and California. A large amount of Amazon's business stems from its local "affiliates" - entrepreneurs who link to Amazon from their own websites and earn a commission. California is arguing that if Amazon has any affiliates residing within its borders, that constitutes a "nexus" and therefore all of Amazon is taxable.

In response, when other states like New York, Colorado, and North Carolina have used this argument in the past, Amazon simply cut its links with in-state affiliates. Rather than having to deal with the 8,000-strong jurisdictional headache, Amazon's preference is to simply stop conducting its affiliate business in that state entirely. As a result, Rhode Island has actually confirmed that it has raised absolutely no new money whatsoever from its sales tax efforts.

Nobody is the winner in this game - not the online retailers, not the state governments, and certainly not the consumers. If (and it's a big If) Internet sales taxes are now viewed as necessary and are going to be imposed, what's needed is federal legislation that would standardize America's many different sales tax regimes. Only through this method - by alleviating the collection burden on businesses and by actually generating more revenue for the states - might such as sales tax work.



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