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States and small businesses have been battling to close a gaping sales tax loophole that has created an unfair playing field in the retail industry. For years, online retailers like Amazon and eBay have avoided collecting and paying over state sales taxes. This has given them a substantial tax advantage over brick-and-mortar retailers that allows them to present customers with lower bills at checkout, despite charging the same amount for goods.
Under federal law, states cannot compel a business to collect sales taxes unless the business has a “physical presence” within the state. In Quill Corp. v. North Dakota, the U.S. Supreme Court reasoned that existing sales tax collection systems were too complex to impose on businesses that did not have a physical presence in the state. It also established that Congress has the authority to allow states to force businesses without a physical presence to collect. Amazon, which is based in Washington and has been at the center of an escalating war on sales tax collection, has contended that its advertisers, warehouses, and subsidiaries in neighboring states were not enough to constitute a physical presence.
In an effort to raise revenues, California passed legislation that expanded the definition of “physical presence” and would have forced Amazon to collect and remit the taxes; however, a couple of months ago, Governor Jerry Brown delayed (PDF) the enactment of that law until September 15, 2012. This move was part of a compromise with Amazon, which had campaigned for a ballot referendum asking voters to overturn the law. Amazon agreed to drop the referendum in return for the delay. Also, Amazon agreed to reach out to its affiliates in California that it dropped when the legislation was first passed. The bill turned on the idea that Amazon’s affiliates were the source of its physical presence within the state.
In all, a costly election contest was avoided, more jobs will be coming to California, and Amazon was given time to lobby federal lawmakers for a national scheme addressing the issue. Amazon was interested in lobbying for a uniform federal scheme because it feared that other states would follow California’s example, resulting in a myriad of complex collection standards with which it would have to comply.
On November 9, 2011, U.S. Senators Lamar Alexander, Dick Durbin, and Michael Enzi introduced the Marketplace Fairness Act, a bill that could give state governments several ways to collect sales taxes. Under one approach, states would sign an agreement altering their sales tax codes so they are all uniform. Then, they would be able to force online retailers to charge a sales taxes. Any state that did not sign the agreement could still force the collection of taxes if they adopt minimum standards that simplify their collection process. The provisions of the Streamlined Sales and Use Tax Agreement provide one example of the ways states would have to simplify their sales tax system. Twenty four states have already adopted the agreement, which was authored by the Streamlined Sales Tax Governing Board, a group established in 2000 to create simplified means of reporting and paying sales taxes. To avoid burdening smaller companies and create incentives for entrepreneurs, all retailers with less than $500,000 in sales per year would be exempt from sales tax collection.
Considering state budget deficits, bipartisan support for tax reform, and the growing desire for a sense of fairness in the marketplace, the Marketplace Fairness Act was inevitable. It could finally level the playing field between Amazon and sellers on Main Street. Supporters also note that the bill is not creating a new tax, but merely closing a tax loophole created years ago. Amazon will be forced to innovate if it wants to continue offering customers discounts, but it most likely still holds an enormous advantage by virtue of being the one-stop shopping center accessible to anyone with a computer. Hopefully this bill passes so that states can enjoy the revenue they always deserved.
– Andrew Farrell
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