New Lines Drawn in “Amazon Tax” Battle
For years now, states and online-only retailers (like Amazon.com) have locked horns over the issue of sales tax. There have been several new developments in this battle, but at this point it’s hard to tell whether the states or the retailers have the advantage.
Amazon, like other on-line only retailers, is only required to collect sales tax in the states in which it has a physical presence. Amazon has warehouses and other facilities in dozens of states (including Wisconsin), but those facilities are technically owned by subsidiary corporations. As a result, Amazon is able to avoid imposing a sales tax on its customers in most states, costing states billions in revenue and giving online retailers an advantage over similar Main Street businesses.
Keep in mind, sales tax is still owed on purchases made online. But instead of being collected by the retailer, customers are supposed to submit the sales tax as part on their income tax return. Few filers do that. In Wisconsin alone, the cost of uncollected sales tax from online purchases is estimated at $127 million per year.
States have moved to broaden the definition of what is considered a physical presence in a state, in the hopes of compelling online retailers to collect sales tax. So far the results have been at best mixed, but the stalemate may have broken when California joined the fray in June of this year. After California broadened its definition of physical presence, Amazon went on the offensive, challenging the change in court and also collecting signatures for a ballot initiative to prohibit the change.
Other states are moving in the opposite direction. South Carolina recently approved a deal with a five-year guarantee that Amazon would not have to require customers to pay sales tax, in exchange for investment and expansion in Amazon’s facilities in the state. As part of the deal, Amazon will send customers a list of their purchases each year, with a note that they may owe sales tax. Texas is also working out a deal with Amazon, trading investment in facilities for exemption from sales tax.
Congress could easily solve this state-by-state approach by clarifying the issue, but has so far been reluctant to take up the matter. That could be changing, as there are now proposals at the federal level that would make online retailers collect sales tax just as Main Street retailers must. Surprisingly, Amazon supports the proposal. That might be because Amazon is hoping for a seat at the table as new tax policy is crafted, or – as this blogger suggests – because the bill has little chance of passing.
Wisconsin has so far been content to sit on the sidelines and let the Amazon wars happen in other states. We have taken some steps to make it easier for on-line retailers to collect tax, mostly by joining a national association that seeks to standardize definitions related to sales tax.
How the current struggles between Amazon and the states will be resolved is anyone’s guess. But there are changes afoot at the state and possibly the national level. For more information about why this issue has proved so challenging, read our 2010 publication, “Examining Wisconsin’s Progress in Leveling the Tax System for Retailers.”