In most states, online shoppers can make purchases without paying sales tax.
But New York isn’t one of those states.
Since the state’s “Amazon Law” went into effect in 2008, large online retailers such as Amazon.com have been collecting sales tax on anything shipped to New York and remitting the funds to the state.
In 2009-10 — the law’s first full year of implementation — the state collected $70 million from the 30-plus online retailers who began paying sales tax, according to Brad Maione, a spokesman for the state Department of Taxation and Finance.
“The numbers speak for themselves,” Maione said. “We believe the law has been relatively effective.”
But the law is under challenge. Shortly after the law was enacted Amazon filed a lawsuit, which is working its way through the courts, claiming the law is unconstitutional because the company has no property or employees based in the state.
As the amount of shopping done online continues to grow, more states are looking for ways to collect the sales tax owed on those purchases.
Donald Bruce, an associate professor of economics at the University of Tennessee and author of a 2009 report titled “State and Local Government Sales Tax Revenue Losses from Electronic Commerce,” said that e-commerce has been a “massive financial problem for states from the start, and it’s gotten larger.” States, he said, have seen their tax base erode at a time of fiscal difficulty.
“Revenues are important,” Bruce said. “This is a matter of fairness.”
Sales taxes are also use taxes, and consumers are required by law to remit the tax directly to the state if the retailer doesn’t collect it.
New York’s tax form even includes a line for unpaid sales taxes, but only 5 percent of taxpayers fill it out, according to the state Department of Taxation and Finance. In 2009-10, the state’s unpaid sales tax line brought in $45 million.
Bruce said the unpaid sales tax line on the state’s tax form couldn’t possibly make a dent in the amount of money New York is losing to online sales. “That line depends on voluntary compliance and there’s no auditing.”
In his report, Bruce writes that e-commerce sales have grown from $995 billion in 1999 to $2,385 billion by 2006, and that by 2012 the annual national state and local sales tax losses on e-commerce will grow to $11.4 billion for a six-year loss of $52 billion. The report forecasts that e-commerce sales will rise to $4 trillion in 2012.
According to Bruce’s study, New York will be owed $18 billion in sales and use taxes between 2007 and 2012, but will collect only $13 billion.
Prior to the Amazon Law, 67 percent of the top 250 Internet retailers in the country collected online sales taxes from New Yorkers; now 86 percent of those retailers do, Maione said.
local shops hurt
Supporters of taxing online purchases say that local businesses face a competitive disadvantage because goods bought online cost less money.
Michael Mazerov, a senior fellow at the Center on Budget and Policy Priorities in Washington estimates that remote online sellers have a five percent to 10 percent price advantage over brick-and-mortar local businesses because they do not charge sales tax.
In a 2009 report, Mazerov wrote that New York’s Amazon Law is an important tool for collecting taxes owed on Internet purchases. He said that all states with sales taxes should “give serious consideration” to enacting a law similar to New York’s, which he described as innovative, noting that the law “is already raising tens of millions of dollars a year — enough to pay the salaries of hundreds of schoolteachers, firefighters and police officers.” He added that states maintain the infrastructure that allows interstate commerce to flourish, and said online retailers should contribute to its maintenance through taxation.
Not everyone believes the state’s “Amazon Law” is constitutional.
Joseph Henchman, tax counsel and director of state projects for the Tax Foundation, based in Washington, said that states are frustrated by “restrictions on their power to tax beyond their borders,” and that laws to tax online sales are a way to get around those restrictions.
He acknowledged that few people voluntarily pay the state’s use tax, but said this doesn’t justify mandating that online retailers to collect and remit sales taxes, which he views as an unprecedented expansion of state taxing authority.
“At its heart, I think it’s an uncollectible tax,” Henchman said. “People view it as weird, if they buy something online or in another state, to remit the tax to New York.”
New York’s law targets retailers who use independent bloggers and websites, known as affiliates, to promote sales; affiliates place links on their sites to the retailer’s site and receive a commission whenever someone follows the link and buys something from the retailer.
The law also requires retailers making more than $10,000 in annual sales in New York through affiliates to charge state sales tax on all sales in the state, not just on those resulting from the affiliate program.
If a retailer can show that its affiliates do nothing to encourage sales other than place a link to the retailer on their website, it can avoid paying sales tax.
Under a 1992 Supreme Court ruling, a state cannot require Internet retailers to charge sales tax on its behalf unless they have a physical presence in that state.
But New York believes that affiliate programs satisfy that requirement.
The state maintains that affiliates are independent in-state representatives of the companies they promote, similar to employees, and provide online retailers with an on-the-ground presence in New York.
Mazerov believes the courts will continue to uphold New York’s law, noting that court decisions have established that states can require out-of-state retailers to collect sales taxes if they use independent in-state representatives to solicit business.
for the courts
Henchman of the Tax Foundation, however, predicted the courts would eventually decide that affiliates are more like advertisers than employees.
New York’s law, he said, seeks to eliminate the long-standing “physical presence” standard required for states to collect taxes, and replace it with what he termed, in a recent report, “a nebulous, arbitrary standard of ‘economic presence,’ where businesses can be taxed in every state where they have customers.”
Amazon eliminated affiliate programs in several other states that passed laws to collect online sales taxes: Colorado, North Carolina and Rhode Island. One company, Overstock.com, eliminated its New York affiliate program after the law was passed.
This trend has led Henchman to conclude that Amazon laws seldom provide the easy revenue they are supposed to.
“In fact,” he wrote, in a 2010 report titled “ ‘Amazon Tax’ Laws Signal Business Unfriendliness and Will Worsen Short-Term Budget Problems,” the nation’s first few Amazon taxes “have not produced any revenue at all, and there is some evidence of lost revenue.”
He said Rhode Island has even seen a drop in income tax collections because of the new law as affiliates have seen their incomes sink as a direct result of the elimination of affiliate programs.
Bruce said states have been forced to find ways to collect online sales taxes because the federal government has refused to step in and clarify what it means to have a physical presence in a state in the age of online commerce.
A proposed federal law, called the Main Street Fairness Act, would force online retailers to collect sales tax for all purchases, but it has stalled in Congress.
Bruce said that if more states pass Amazon laws, it will force the federal government to step in.
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