News / Article

Amazon Facing End of Sales Tax Loopholes in 2012

Source: - Nov 28, 2011

Brian Glaser
Corporate Counsel
November 29, 2011

Earlier this year, online retailer massed its legal and political troops to battle the State of California over a proposal to require the site to collect sales tax from customers. Now, with the 2011 holiday shopping season in full swing, Amazon is facing the fact that its no-tax loophole is almost certain to close in the new year.

The New York Times reports that "by the time Black Friday rolls around next year, and other Internet retailers will have begun collecting sales taxes on purchases made by their California customers, the result of a deal struck with lawmakers in September." Reporter Aaron Glantz provides a brief overview of Amazon's efforts to block the new tax law, as well as those of offline retailers who lobbied for the legislation:

Brick-and-mortar retailers lobbied hard for the new law, which they said could significantly change shopping patterns. . . Shoppers often touch and test products in the physical stores before buying them online, where they are often cheaper.

California is the focal point of Amazon's battles, but it is headed toward becoming an issue in all 50 states, which lose out on opportunities to fill government coffers with sales tax on their residents' online purchases.

The Boston Herald says, "Conn. sees Internet tax delayed after legal fight"; Florida Today reports, "Florida lawmakers seek to close online tax loophole"; and Indiana's Evansville Courier and Press says, "Hoosier retail group launching online sales tax ad blitz."

Of course, online purchases haven't ever actually been tax-free. The tax-code loophole that Amazon and other online sellers take advantage of is the "use tax," which shoppers are supposed to keep track of and pay each year. Forbes explains the use tax issue in "No Sales Tax Cyber Monday (But Beware Use Tax)!" Reporter Robert Wood writes:

For decades, you "should" have been reporting your catalog, phone and now online purchases. States historically didn't enforce use tax except against businesses, but that's changing. Many state income tax forms now attempt to collect use tax.

Use tax is the flip side of the sales tax. Sales tax applies when you buy tangible personal property at retail in your state. It also applies if you buy over the phone, through the mail or internet from a merchant having "nexus" with your state.

There's no constitutional prohibition on this. Sales and use tax are almost always paid by the buyer, but the only effective collection mechanism is getting the seller to collect it. The states have been aggressive for decades, but the U.S. Constitution prevents states from taxing "interstate commerce."

The new California law addresses the should/must divide of online-shopping tax collecting, with other states following suit. And while that may be good news for state budgets in 2012, they're still missing out on any tax windfalls from 2011's Black Friday, Cyber Monday, and the rest of the peak retail season.

See also: "Amazon Surrenders on California Tax Law, But Still Fights Nationally," CorpCounsel, September 2011.

Category: General Business