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States Eye Internet Sales Tax

John Cummings March 25th, 2009

States are hurting for revenue, and the $140 billion in fiscal relief in the American Recovery and Reinvestment Act won’t be enough to dig them out of the hole. A new study from the Center on Budget and Policy Priorities estimates the states’ budget shortfall at $350 billion to $370 billion in the next two and a half years. The stimulus package funds will cover about 40 percent of that.

So it’s no wonder that state lawmakers are slavering over a potential stream of sales tax income that continues to flow by, seemingly forever out of reach, in the form of Internet transactions. Their hands are tied by a Supreme Court ruling dating back to the Pleistocene era of the World Wide Web (1992) that bars states from requiring remote sellers — catalog merchants as well as online retailers — to collect sales taxes.

But the Amazons of this world may not be able to shield their sales from state taxation for much longer.

New York won a skirmish with Amazon and Overstock.com in January when the state’s Supreme Court upheld a 2008 law requiring online retailers to process sales tax on orders they receive through affiliate Web sites based in the state. The Web giants, which had argued that their connections to thousands of New York sites didn’t constitute a physical presence in the state, said that they would appeal.

California, Connecticut, Minnesota, Tennessee, and Hawaii have introduced legislation modeled on the New York law.

More worrisome for the online sellers, though, is the steadily increasing number of states adopting the Streamlined Sales and Use Tax Agreement (SSUTA). This initiative evolved as a direct response to the 1992 Supreme Court decision, which ruled that the existing system was too complicated to impose on a business that lacked a physical presence in a state. SSUTA seeks to substantially reduce the burden of tax compliance for Internet and catalog retailers. Nineteen states are currently in full compliance with SSUTA, and three more will be by July.

The more states sign up for the SSUTA, the greater the pressure they can exert on Congress to act. And legislation to enable states to impose sales taxes on Internet transactions would likely find an attentive audience in the current Congress.

Tax-free Internet purchases may soon be a thing of the past. ###

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4 Comments to “States Eye Internet Sales Tax”

Karen Kroll Says:

March 25th, 2009 at 4:08 pm

As much as I don’t like paying taxes, it really doesn’t make sense that sales done over the Internet aren’t taxed, while those that take place in a store are. Karen
John Cummings Says:

March 27th, 2009 at 4:09 pm

It might have made sense back in the early days of online purchasing, to help fledgling companies in a totally new kind of market. But these days it’s the bricks-and-mortar businesses that need help, and are being pushed to the brink by the likes of Amazon.
Joel Lesser Says:

March 27th, 2009 at 4:13 pm

Keeping internet purchases sales tax free not only generates additional revenue for companies, but provides additional (or at least maintains) jobs for the economy and increases other tax revenues for both the state and federal government, such as income and payroll taxes. Taxing internet sales just seems contrary to the very core idea of the web.
John Cummings Says:

March 27th, 2009 at 5:25 pm

True, a tax-free Web has generated terrific growth for many businesses, and jobs, and revenues for the states. An Internet sales tax is bound to have a dampening effect on that economic activity. You could make the same arguments against any sales tax, and indeed there’s a case to be made there. But the states are not going to swear off sales taxes anytime soon, and in the meantime you can’t blame the non-Internet retailers for complaining that there’s a certain inequity here.

I’m not sure taxing internet purchases would be contrary to the core idea of the web. That seems to be constantly changing and evolving anyway. I remember the days — this is how ancient I am — when any kind of commercial use of the Internet was frowned upon and sellers were viewed as interlopers. Lucky for us, that didn’t last.