The days of shopping online without paying sales taxes may be ending. States are cracking down, and a nationwide system for collecting sales tax on online sales may be coming soon.
Several developments in recent weeks show how quickly the landscape is changing on what has long been an important but elusive goal for state officials: collecting sales tax from online retailers.
States and localities could reap as much as $11 billion a year, according to one study. Internet shoppers are already supposed to pay the money on their own but rarely do.
So state officials and local retailers cheered when New York state’s “Amazon tax,” designed to collect taxes on purchases at Amazon.com and similar sites, survived a challenge last month in the state’s highest court. It was a significant victory, especially after courts struck down similar laws in Colorado, Illinois and North Carolina.
Amazon itself is shifting strategies. Facing both pressure from states and new business demands, the company is collecting sales taxes on sales to customers from nine states, and it will add another seven states this year. By 2014, it will collect sales tax from half of its customers.
In many cases, Amazon agreed to collect taxes in states where it is building new facilities, and the agreements do not apply to other online retailers.
Amazon is backing efforts to set up a national system for collecting online sales taxes, which could simplify the process for the company and ensure its competitors have to collect the taxes, too.
Supporters of the idea scored a major victory last month, when the U.S. Senate, in a 75-24 advisory vote, backed a plan to let states collect sales taxes on online purchases.
Three states this year built major legislation on the assumption that Congress would soon pass a nationwide system for online sales tax collection. Missouri would use the money for tax cuts, while both Maryland and Virginia included it in the mix of new funding for transportation packages.
“These deals and legislation and resolutions that are passing in states are really sounding the trumpet to tell Congress loud and clear that this is a problem that needs to be fixed on the congressional level as soon as possible,” said Max Behlke, manager of state and federal affairs for the National Conference of State Legislatures.
States have tried to collect sales taxes on online purchases since the Internet’s infancy. But legal, logistical and political problems blocked their way.
Well before the invention of the Internet, courts blocked state attempts to collect sales taxes on goods sold by out-of-state vendors, because the Constitution says only Congress has the power to regulate interstate commerce.
In a 1967 case dealing with mail-order purchases, the U.S. Supreme Court said companies had to have a physical presence in a state’s borders for that state to impose taxes on its purchases. That rule remains in effect today.
But it is still hotly debated. The New York Court of Appeals, the state’s top court, ruled recently that the state’s 2008 law requiring all online retailers to collect a sales tax stands.
The court said New York could tax purchases from Amazon and Overstock, because both companies had in-state affiliates that they paid to promote their companies.
Plus, the court added, Amazon and Overstock do not pay the taxes themselves, but their in-state customers do. “They are collecting taxes that are unquestionably due, which are exceedingly difficult to collect from the individual purchasers themselves, and as to which there is no risk of multiple taxation,” the court wrote.
One judge dissented, arguing that the companies did not have enough of a physical presence in New York to be subject to its sales tax law. Amazon and Overstock, he said, were acting like companies that advertised in local newspapers when they recruited local affiliates. Although they were paid, the website owners were not promoting Amazon and Overstock as sales agents would.
The plan before Congress, called the Marketplace Fairness Act, would set up a national system for collecting online sales taxes. Individual states would choose whether they wanted to join.
They could join in one of two ways. The first option would be to join an existing collaboration among states and retailers to “streamline” sales taxes across state borders. So far, 24 have signed up for the project, overseen by the Streamlined Sales Tax Governing Board. More than 1,900 retailers — including Walmart and J.C. Penney — already voluntarily collect sales taxes from online sales. Their customers have paid states and localities $1.2 billion since October 2005. North Carolina, Ohio and Oklahoma have each collected more than $100 million.
The second option for states would be to simplify tax collection and auditing on their own, and meet other requirements, to start collecting online sales taxes.
Joshua Baca, spokesman for Alliance for Main Street Fairness, which represents retailers, said the flurry of activity in states helped show Congress that a federal law is needed. Even though more of Amazon’s customers are paying sales taxes, customers for other online sellers may not be. Brick-and-mortar stores have no choice but to collect the taxes.