The Center on Budget and Policy Priorities (CBPP) is recommending that states collecting sales tax "give serious consideration" to adopting e-fairness legislation similar to the sales tax laws enacted by New York and Rhode Island.
In the study "New York's 'Amazon Law': An Important Tool for Collecting Taxes Owed on Internet Purchases," CBPP noted that the failure to collect taxes owed on Internet purchases has cost states billions of dollars each year and is making it harder for them to fund critical public services.
"At a time when states are under severe fiscal stress and many have been compelled to raise taxes, they have a special obligation to make sure that all taxes that are legally due under existing law are actually collected," said Michael Mazerov, senior fellow, State Fiscal Project, for the Center on Budget and Policy Priorities, and author of the study. "Laws like New York's are legitimate tools for chipping away at the problem of uncollected taxes on remote sales."
The study notes that "because most of the largest Internet retailers operate affiliate programs, a significant portion of the revenue loss arising from untaxed Internet sales could be avoided if numerous states enacted and enforced similar laws. Those online retailers that choose to drop their in-state affiliates rather than collect taxes seem likely to lose market share to local merchants and to online sellers that do collect taxes. If a significant number of the largest states enact these laws, it seems likely that many Internet retailers will eventually reinstate their affiliate programs and begin to collect the sales tax."
The current status quo, the report continued, undermines local businesses since it provides remote sellers with a five to 10 percent price advantage over bricks-and-mortar stores when they do not charge sales tax. This advantage makes it harder for some Main Street businesses to stay open, the report stated. Making matters worse, "remote sellers benefit extensively from the public services their customers' home state provides," Mazerov writes. "States and localities play a critical role in providing the range of safeguards and services that permit interstate commerce to flourish. For example, they furnish the roads that enable goods to travel between remote sellers and their customers, as well as the police and fire protection for the goods in transit."
Among the reasons that remote sellers provide for not collecting and remitting sales tax is that, due to the various tax rates, it would be too burdensome. The CBPP report, however, stresses that "a nationwide responsibility to collect and remit sales taxes is not unreasonably burdensome. Many large online merchants already collect sales taxes on behalf of nearly all states; indeed, Amazon calculates and collects sales tax in every state except Vermont on behalf of Target, which sells on Amazon's website."
Remote sellers have also claimed the e-fairness provision is unconstitutional. In 2008, after New York State passed its e-fairness provision, Amazon challenged the law in New York State Supreme Court. The challenge was tossed out, but the online retailer has since filed a notice of appeal with New York's Appellate Court. However, as the report noted, "Considerable evidence suggests that courts will continue to uphold these affiliate nexus laws as a legal solution to part of the Internet sales tax problem." For example, the New York Department of Taxation and Finance is "interpreting and enforcing the law in a narrow way that makes it even more likely that higher courts will uphold it.... New York affiliates must engage in additional in-state activities aimed at encouraging their readers to buy through the affiliates' links to the retailer (such as targeted mailings)."
If an e-fairness provision were widely adopted by a large number of states, the resulting "sales tax revenue collected could make a meaningful dent in the Internet sales tax gap." CBPP reports that at least 210 of the 250 largest Internet retailers operate affiliate programs, and Amazon reported having 500,000 affiliates in its Associates program in 2000. The company "likely has many more today; accordingly, it likely has many affiliates in every state levying a sales tax."
Read the report in full on the CBPP website.