New York state did the right thing, by itself and all those bricks-and-mortar, taxpaying, job-producing local merchants, when it passed a law in 2008 allowing it to collect sales tax from online giants like Amazon that have no direct physical presence here. The law expanded the definition of physical presence, applying it to online retailers that pay “affiliates” with in-state websites to direct buyers their way through advertisements, coupons, etc.
We were glad to see the state’s highest court, the Court of Appeals, uphold it last week. We’d be even happier if Congress made state laws like this one unnecessary by no longer protecting Internet sales from taxation.
Conservatives in Congress, of course, are dead set against any new tax, even if it’s one that out-of-state businesses should be paying because their local competitors already are. In the absence of a national law requiring online retailers to collect sales tax for the states (which would be perfectly justified because these interstate sales fall under the commerce clause), the controlling authority is a 1992 U.S. Supreme Court ruling that said states and localities can only make out-of-state retailers collect sales tax if they have a “substantial nexus” to the state. The ruling was in a case involving mail-order companies, but Congress extended it to online retailers.
This has many negative effects. Not only does it disadvantage local merchants, who must by law collect sales tax on goods and services. It deprives state and local governments of badly needed revenue, which other taxpayers, including those very same local businesses, must make up. It’s a double whammy that can drive the locals out of business, further reducing the tax base and requiring the remaining businesses to pay more. A triple whammy.
Since adopting the law in 2008, New York state has managed to capture $500 million in sales tax revenue it otherwise wouldn’t have gotten. That’s a considerable amount, but it would be much more if the state could simply collect on all online sales, regardless of a physical nexus. Overall, the states are losing $12 billion annually on online sales, according to the National Conference of State Legislatures.
Tax policy shouldn’t determine where consumers shop. Nor should it determine where online retailers locate or with whom they do business (some will now move out of states that force them to collect sales tax and terminate relationships with affiliates in states with laws like New York’s.)
Congress should end the patchwork quilt of laws and level the playing field for all retailers. It can do so by passing the Marketplace Fairness Act of 2013, which would authorize any state that has simplified its sales and use tax laws to require out-of-state online merchants to collect and remit those taxes.
E-commerce is the fastest-growing kind. If it ever needed a break, it does no longer.