States seek bonanza in online sales taxes

Daniel C. Vock / Stateline.org /

The days of shopping online without paying sales taxes may be ending. States are cracking down, and a nationwide system for collecting sales tax on online sales may be coming soon.

Several developments in recent weeks show how quickly the landscape is changing on what has long been an important but elusive goal for state officials: collecting sales tax from online retailers.

States and localities could reap as much as $11 billion a year, according to one study. Internet shoppers are already supposed to pay the money on their own but rarely do.

So state officials and local retailers cheered when New York state’s “Amazon tax,” designed to collect taxes on purchases at Amazon.com and similar sites, survived a challenge last month in the state’s highest court. It was a significant victory, especially after courts struck down similar laws in Colorado, Illinois and North Carolina.

Amazon itself is shifting strategies. Facing both pressure from states and new business demands, the company is collecting sales taxes on sales to customers from nine states, and it will add another seven states this year. By 2014, it will collect sales tax from half of its customers.

In many cases, Amazon agreed to collect taxes in states where it is building new facilities, and the agreements do not apply to other online retailers.

Amazon is backing efforts to set up a national system for collecting online sales taxes, which could simplify the process for the company and ensure its competitors have to collect the taxes, too.

Supporters of the idea scored a major victory last month, when the U.S. Senate, in a 75-24 advisory vote, backed a plan to let states collect sales taxes on online purchases.

States have tried to collect sales taxes on online purchases since the infancy of the Internet. But legal, logistical and political problems blocked their way.

Well before the invention of the Internet, courts blocked state attempts to collect sales taxes on goods sold by out-of-state vendors, because the Constitution says only Congress has the power to regulate interstate commerce.

In a 1967 case dealing with mail-order purchases, the U.S. Supreme Court said companies had to have a physical presence in a state’s borders for that state to impose taxes on its purchases. That rule remains in effect today.

But it is still hotly debated. The New York Court of Appeals, the state’s top court, ruled recently that the state’s 2008 law requiring all online retailers to collect a sales tax stands.

The court said New York could tax purchases from Amazon and Overstock, because both companies had in-state affiliates that they paid to promote their companies.

Plus, the court added, Amazon and Overstock do not pay the taxes themselves, but their in-state customers do.