As increasing numbers of states are running into budgetary problems, some of them are starting to look at taxing Internet sales.
When the Internet first started becoming a commercial entity, Internet sales were exempted from sales taxes in order to help encourage new commercial companies to form on the Internet. But now, with Internet retail firmly established, legislators are starting to say such protections are no longer needed.
Currently, the law -- due to the 1992 Supreme Court ruling of Quill vs. North Dakota -- is that an online retailer has to pay taxes on sales only if it has a physical presence in a state. The argument by opponents of such taxes is that, without such a physical presence, it isn't using state services and so shouldn't have to pay state taxes.
(Technically, according to that same ruling, it is not the seller that owes taxes, but the buyer. However, states don't have an efficient mechanism for enforcing the collection of such taxes from the buyer, so they currently come from the seller.)
Moreover, some Internet retail companies, such as Amazon, have structured their companies in such a way as to avoid paying sales taxes as much as possible. "By creating wholly owned subsidiaries for the parts that are treated separately for tax matters, Amazon is under no obligation to collect sales tax," read a recent article in the New York Times. This legal technique is called “entity isolation,” said Michael Mazerov, a senior fellow at the Center on Budget and Policy Priorities in Washington. Amazon has offices in four cities in California, for example, including those that are home to the subsidiary that developed the Kindle. “Because the subsidiary isn’t selling the Kindle directly to consumers, Amazon can drive a truck through the loophole,” Mr. Mazerov said."
In addition to reducing local tax revenues, the inability to collect such taxes also is unfair to local businesses that have to pay the tax, and to people who can't afford to buy products over the Internet, say proponents of such taxes. Earlier this year, the National Conference of State Legislators estimated that such taxes could bring in $7.5 billion per year.
Sellers such as Amazon claim that paying state and local taxes -- in as many as 7,500 jurisdictions in the U.S. -- would be overly complicated. Critics of such arguments, however, point out that not only do vendors such as Walmart.com manage to do it, but so does Amazon, because it manages sales for Target.com.
In an attempt to defuse this argument, a number of states have joined the Streamlined Sales Tax project, which is intended to simplify sales taxes for Internet companies. 44 states participate in the organization. Of those, 23 -- comprising 33 percent of the country's population -- have passed legislation conforming to the agreement.
The states are Arkansas, Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Nebraska, Nevada, New Jersey, North Carolina, North Dakota, Ohio, Oklahoma, Rhode Island, South Dakota, Tennessee, Utah, Vermont, Washington, West Virginia, Wisconsin and Wyoming. Conforming legislation has been introduced in Texas, Massachusetts, Florida, Illinois, Virginia, Missouri, Maine, Wisconsin, California, and Hawaii.