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Internet Sales Tax Debate: Where do you Stand?

Last updated by on 12 Comments

There has been a lot of press lately about increasing interests from states to start requiring internet retailers to start collecting sales tax for purchases made by customers located in their state in an effort to help close state budget gap shortfalls.

The most publicized case has been the state of California, who expects to bring in an additional $317 million a year from internet purchase taxes.

California is actually the seventh state to try to get around a 1992 US Supreme Court ruling holding that sellers can’t be forced to collect sales taxes unless they have a physical presence in the state – with affiliate advertisers or brick/mortars being considered “physical presence”. So what has Amazon, Overstock, and other large internet retailers done to avoid collecting taxes? By cutting off relationships with all of their affiliate advertisers in those states (so they no longer have a “physical presence”).

As always, there’s two sides to every story.

internet sales tax

Those in Favor of an Internet Sales Tax:

Those in favor of an internet sales tax in California and elsewhere argue that:

  • taxing internet sales levels the playing field with brick and mortar retailers and removes an unfair competitive advantage
  • it’s a good way to raise tax revenue in difficult financial times, especially when it is already required
  • brick/mortar retailers in states have suffered, which has led to a loss of sales tax revenue

Those Opposed to an Internet Sales Tax:

  • Amazon and other large internet retailers are strongly opposed. It would cut into their margins and possibly lower sales volume while not giving much benefits to the states
  • Internet retailers argue that this legislation is pushed by brick/mortar retailers like WalMart and BestBuy
  • Claim that it’s an added tax on consumers in a time when they don’t need it

As much as I personally don’t want to pay additional taxes, I think the ‘con’ side arguments are fairly weak in comparison – and I don’t like Amazon’s strategy of throwing it’s affiliates under the bus to keep avoiding consumer taxes on purchases. Many will be forced to close their business or move to another state (and eventually there’s only so many states they can move to).

Those are my thoughts – and I want to get yours too.

What’s your Take on the Internet Sales Tax?

Nobody wants to pay additional taxes – I think that’s well established. But, the real question here is more about principal than personal interests.

The two questions I have for you are:

1. Should internet retailers be able continue to not have to collect & remit state sales tax?

2. If all internet retailers were taxed would you buy less stuff online?

(take the polls and share your feedback in the comments)

Should internet retailers be able continue to not have to collect & remit state sales tax?

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If internet retailers all started collecting sales tax, would you buy less stuff online?

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About the Author
I am G.E. Miller, & this is my story. My goal is financial independence ASAP. If you share that goal, join me & 7,500+ others by getting FREE email updates. You can also explore every post I have written, in order.

  • Bryce says:

    The major disadvantage you are missing is that there are over 7000 sales tax districts (states, counties, cities, etc) to keep track of. The reason for the original supreme court ruling wasn’t that merchants from out of state shouldn’t have to collect sales tax on principle, but rather that it would place an undue burden on those retailers. As brick and mortar stores would only have to worry about a small set of tax districts, this would place the burden unfairly on online/mail-order businesses, who would face substantial costs to be able to handle a small number of sales from most of those district. All the states have to do to force retailers to collect sales tax and conform with the ruling is to provide a simplified sales tax system.

  • R S says:

    In terms of overall employees and office building space, etc, I’m sure the states reap some benefit from having Amazon other online retailers located in their state. They will be paying business taxes, property taxes, etc. They have other expenses that B&M stores don’t have, such as shipping expenses. The price hike on Netflix’s service is a real awakening to the cost of a mail-service oriented business.
    Amazon’s strategy of throwing affiliates out if their state imposes taxes, is their way of fighting back. It’s unfortunate, but it’s the only way they have to show disapproval, otherwise they will be put into situations that they do not deem profitable. OTOH, hopefully this makes the affiliates work alongside Amazon, in the fight.
    Pushing sales taxes onto online retailers, where they didn’t apply before, may have a ripple effect on the economy/job situation..

  • Warren says:

    Couldn’t there just be a flat internet tax rate, that gets paid based on the zip-code of where the purchases are shipped? It wouldn’t be complicated, and would be revenue generating for states/cities that are in need of additional income.

  • Health Forum says:

    I think that everything should be taxed online just like everything else

  • Natalie says:

    Technically, all of these sales are already taxed. It’s called a use tax and it’s supposed to be paid by the consumer directly to the state. If you’ve ever owned a retail business or bought a car in a different state, I’m sure you are familiar with this form. The trouble is that the state cannot reasonably pursue individuals not complying with this law. (Unless you’re trying to register that car!) It wasn’t a big deal when there weren’t many interstate transactions. Now it’s become a problem.

    I think shifting the collection and remittance of the tax to the retailers is necessary. I think a fair compromise for the moment would be to only collect state sales tax instead of having to worry about every county and township too.

  • Justin @ MoneyIsTheRoot says:

    Good topic GE!

    I’ve thought about this for a long time. In a sense of fairness, it does seem that everyone should be treated equally in this situation, and that all should be taxed. Though I am tired and sort of bitter towards the brick and mortar stores like Best Buy that push worthless warranties, have bad return policies, and have overly marked up products. So I am bias and sincerely hope that online retailers never have to collect sales tax here in Michigan!!! I always shop online…I bought a pair of sketchers for $45, no tax, no shipping fees! The same pair at even DSW wouldve cost me $55 plus tax! Online shopping does it better, because you can sort through 1,000 stores and weed out those that rip you off like Best Buy and Sears.

    • BG says:

      Your sketchers were tax free, or did you neglect to pay the use tax?

      Most states require their citizens to pay a use tax when the citizen imports goods from another state. This burdon is currently on the consumer…

  • BG says:

    If the retailer does not collect the tax then the current burdon is on the consumer to pay the use tax.

    I agree that the burdon needs to be shifted to the online retailers.

    What is more efficient, having every consumer fill out the use tax forms, or the businesses collect the sales tax?

    • Bryce says:

      For a small company that does mail order / internet business in say 5 states, it seems easier to have the company do the use tax filings. And for states like Idaho that don’t have local option sales tax, that would be true. But for states like Texas that do, all of a sudden supporting one state means adding cities, counties, business districts, etc. that all charge sales tax and determining which of those areas cover a particular address. Individual consumers, on the other hand, only have to keep track of the entities that tax their physical address. It’s definitely less complicated to have the residents file use taxes.

      I do agree that having individuals file use taxes puts incentives in the wrong place. When I was studying for my accounting degree, a classmate from the state tax authority mentioned that a very small percentage of the state population actually pay their use tax- and a large majority of those that do work for the state. But I still don’t have much sympathy for the states, who have failed to come up with a simplified sales tax code scheme that is consistent with the original court ruling.

      • BG says:

        The simple solution is for each state to have a flat rate and forward along a portion to the local districts based on population. This way you only deal with 50 rates instead of thousands.

        • Bryce says:

          Which would meet the court requirement. But that would put limits on the ability of local tax authorities to change their tax rates or even encourage tax competition, so that solution hasn’t been widely embraced to date.


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