Taxing of Internet Purchases

[Kevy Baby]

Here is a topic that doesn't seem to be getting much press (although I may just not have seen it).

California tells online retailers to start collecting sales taxes from customers

This new law, signed into effect by Governor Moonbeam (I refuse to give up on that moniker), goes into effect on July 1. Several other states already do this.

One important notation about this is that this only affects online sellers who have some sort of presence in California. If you purchase from an online retailer that is strictly in a state other than California, then no tax is collected (the Supreme Court ruled in 1992 that online sellers don't have to collect tax unless they have a physical presence in the state).

Amazon is getting around this by halting association with any partner that is based in California.

While as a consumer, I would prefer they didn't collect tax, I don't understand WHY this is the case: why shouldn't online retailers collect sales tax? Obviously I need to look into this more for the ruling.

Interesting topic.

[innerSpaceman]

Yes, and it's messed up either way. I hate for Amazon and other on-liner's to have an unfair competitive advantage over brick&mortars. But at the same time, tens of thousands of jobs were just lost in California when Amazon cut loose all its CA affiliates to avoid the new sales tax (not to mention all the sales tax revenue to be lost when most of those affiliates move to others states in order to get back together with Amazon).

Of course, this is arguably a new tax, which must be approved by 2/3 of the legislature - meaning this dispute will be tied up in court for years.

This is a total cluserfvck.

[Ghoulish Delight]

It's definitely not a new tax. Everyone up to this point has actually technically been required to pay the tax. But up to this point, the onus has been on the customer to report the purchase to California on your state tax return and do the right thing.

No one does it, and there's no way to enforce it. But forcing retailers to collect and pay it is not exactly creating a new tax.

The reason it was that way is because it raises difficult Constitutional questions regarding inter-state trade. Does California have the authority to do this? The justification is that having any small presence in California, even employees or affiliates, is enough to consider it in-state trade. That seems to be a tenuous definition and will likely be where the legal challenge comes from. Just because Amazon happens to pay some people that do work in California, it seems quite a stretch to treat a transaction that doesn't involve anyone within California (e.g., I buy from a reseller who's locate in Kentucky) as in-state commerce.

[Alex]

I'm in favor of these laws and Amazon's response to them as it made Roger Ebert's Twitter stream easier to tolerate (he would post stuff just to drive purchases as a way to support his online habits, but Illinois is one of the states that recently ran into this and so he was cut off from that stream).

On the other hand, Adam Carolla's podcast is going to have issues if Amazon is really a significant portion of how he justifies that (about 6 weeks ago he spent a fair amount of time talking about how it was the success of the Amazon sponsorhip that convinced him to reject a multimillion multiyear terrestrial radio deal).

While as a consumer, I would prefer they didn't collect tax, I don't understand WHY this is the case: why shouldn't online retailers collect sales tax? Obviously I need to look into this more for the ruling.

It isn't so much "why" as "how." Stores argue that they can't possibly be experts in collecting and dealing with taxes for every jurisdiction that one of their customers might transport the purchased goods to. Especially if they don't otherwise have any presence there (the argument being that there really isn't any fundamental difference between me driving to Vermont and driving back with a pint of Ben & Jerry's vs. them mailing it to me).

And mail order companies went through this more than a century ago which is why most state laws need to be adjusted to deal with modern ecommerce.

This is why, technically, when you currently buy books from Amazon (or a refridgerator in Nevada) you are supposed to voluntarily send the sales tax (aka "use tax") to the state of California. Of course, nobody does this and that is why when a huge volume of business moves into otherwise untaxed channels, the states start to bitch about it.

The law doesn't so much create a new obligation for businesses to pay sales tax as change the definition of what it means to have a business presence in the state. And it makes some logical sense. If Amazon paid a person to sit at a cart in a mall and sell people stuff via a laptop they'd have to pay taxes, but if they instead pay that person to do it from their own home, they don't.

It's one of those situations where everybody involved is 90% right.

[BarTopDancer]

What about person to person sales Amazon hosts? I sell my old electronics on there. My phone was sold to someone in Sacramento. Is he supposed to now pay taxes to me and I pay to the state? Does Amazon handle it?

[innerSpaceman]

Don't the states have enough influence to have a federal law passed requiring Amazon (and its ilk) to charge each customer the sales tax appropriate to their shipping address, and pay that out to the states? It would be pretty comical to watch Amazon claim that was too difficult, when their computers tell me five times a week what they think I'd like to buy next by analyzing every frickin' click I ever make.

[Alex]

Part of it is

a) It isn't just 50 states (minus the ones without sales taxes) but much more local than that (as evidenced by sales tax being different depending on which side of the Walt Disney Resort you're on.

b) Having to maintain the information to allow audit by whatever number of taxing authorities that would be.

Obviously they could do this if they had to, but they don't want to. Plus consumers, for the most part, don't want them to have to do it either. It is hard for me to imagine a huge groundswell for the feds to figure out how to make us have to pay sales taxes that we're currently quite content avoiding (see, for example, the indignant outrage in Vancouver, Washington, any time there is something that cracks down even a little bit on people not paying taxes on large purchases in Portland).

But Amazon has said that if there is a policy, it should be a federal one so they just have to deal with it once.

[Kevy Baby]

Originally Posted by Ghoulish Delight

The reason it was that way is because it raises difficult Constitutional questions regarding inter-state trade. Does California have the authority to do this?

It isn't as through California is a trailblazer on this; from the article I linked to:

California is the seventh and largest state in the country to pass a law to collect taxes on out-of-state Internet sales. Illinois, Arkansas and Connecticut acted earlier this year, North Carolina and Rhode Island in 2009 and New York in 2008. Amazon sued to overturn the New York law and lost in the lower courts. The company is paying sales taxes into an escrow account pending an appeal.

Stores argue that they can't possibly be experts in collecting and dealing with taxes for every jurisdiction that one of their customers might transport the purchased goods to. Especially if they don't otherwise have any presence there (the argument being that there really isn't any fundamental difference between me driving to Vermont and driving back with a pint of Ben & Jerry's vs. them mailing it to me).

As far as to which locality to base the tax on, I think the simple answer is the shipping address. While some might find loopholes, I think this is a simple and safe way to determine the tax base.

And the implementation of assesing, collecting and distributing the taxes, in the grand scheme of things, wouldn't be that difficult. It is simple enough to maintain a database of tax rates by Zip Code, including the entities that need to get what portion of that tax (the California State base rate is 7.5% and various counties and/or cities add their portion on top of that).

There is the added complexity of what is taxable as different states have different tax laws. However, it would be simple enough to add classifications to the lookup tables.

not to mention all the sales tax revenue to be lost when most of those affiliates move to others states in order to get back together with Amazon

According to the article in my OP, this new demand would "raise an estimated $317 million a year in new state and local government revenue" while "the affiliates combined paid $152 million in state income taxes last year..." While this is by no means a complete analysis, I personally would be willing to give up $152 to gain $317

[Alex]

Originally Posted by Kevy Baby

"raise an estimated $317 million a year in new state and local government revenue" while "the affiliates combined paid $152 million in state income taxes last year..." While this is by no means a complete analysis, I personally would be willing to give up $152 to gain $317

I think the point is that if in response to this Amazon simply eliminates the affiliate program California is giving up $152 million to gain nothing (since they won't be getting any sales tax from Amazon) and then if large successful affiliates move to Nevada to stay in business California also loses additional income tax from whatever additional they would have paid.

And again, while maintaining differentiation for each tax jurisdiction may not be that difficult in the grand scheme of things, it also is still a pain in the ass and not particularly cheap to comply with on the purchase end and an even bigger pain in the ass to comply with on the audit end. But I'm not so much arguing for why Amazon shouldn't have to do this, but for why Amazon will not want to do it if they can at all avoid it.

But for anybody who thinks Amazon should have to do this, I would be curious to know how consistently they pay use taxes on purchases from out of state?

[Stan4dSteph]

There is a space to pay sales tax from mail order purchases on the NY state income tax form. It's up to you to determine how much you want to pay in. Any store that has a physical location inside NYS must charge sales tax on a mail order purchase if shipping to an address in NY. We started having to pay sales tax on LL Bean after they built stores here.