Amazon.com Inc and other out-of-state online retailers must collect state tax on New York state customers, the state’s highest court ruled on Thursday, a decision at odds with other courts that could set the stage for a showdown in the U.S. Supreme Court.
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“The ruling by the New York Court of Appeals conflicts with both the U.S. Supreme Court’s precedents and with contrary decisions by other state courts that have looked at the same issue,” an Amazon spokesman said by email.
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Eight other states have passed legislation similar to New York’s, which requires out-of-state retailers to collect sales tax even when they do not have a physical presence in the state, but do have affiliates in the state.
Retailers with a physical presence in any state must always remit sales tax on purchases made either in a store or online, but since a 1992 Supreme Court decision, Quill Corp v. North Dakota, retailers lacking a “nexus” of operation in a state have not been required to collect sales tax.
Link to the rest at Reuters and thanks to Joshua for the tip.
Passive Guy has blogged about this topic several times. In addition to a reprise of his earlier comment below, he’ll talk about an unreported aspect of this issue.
Virtually all of the press reports on this issue focus on Amazon and other large etailers.
What is missed is the potential impact on very small businesses that operate online, including authors who sell their own books.
If I operate an online business from my home in Iowa, I may be able to figure out Iowa’s sales tax laws so I can collect sales tax from my Iowa customers.
However, keeping track of New York’s far more complex sales taxes is a whole different issue. Multiply that by 48 other states and it becomes overwhelming.
Consumers may assume that sales tax is a straight percentage of the amount of the sale, but it’s much more complicated than that. In some states, there are state, county and city sales tax rates that vary depending upon the location of the sale. A sale that takes place inside a city’s boundaries generates a different sales tax than one that occurs across the street in an unincorporated area. The zip code won’t tell you what sales tax rules govern the sale.
Many states have different sales taxes depending upon what type of product is being sold and there can be dozens of different product categories. Fresh vegetables may have a different sales tax rate than frozen vegetables.
Sales taxes at a physical store involve only a single set of state, county and city sales taxes based on its location. The store’s owner has to keep track of only one set of product-based tax rates.
Making a small home-based business in Iowa responsible for every permutation of sales tax for every location in the United States where one of its customers might live is extraordinarily unfair. Subjecting this Iowa business to the threat of a sales tax audit requiring an in-person appearance in Hawaii is an enormous burden on interstate commerce.
Here’s PG’s prior comment from 2011 on the legal aspects of forcing sellers to collect sales taxes:
Passive Guy understands political types trying to find new sources of tax revenue wherever possible, but Amazon and other well-managed companies stay competitive by managing costs very carefully. One of those costs is the cost of taxes.
The US Supreme Court has ruled on this sales tax issue on more than one occasion. The fundamental rule their decisions have established is if a company does not have a physical presence in a state – sales office, warehouse, etc. – the state does not have the constitutional right to require the company to collect sales taxes. There has to be a definite link, a material connection, between the state and the person or entity it seeks to tax. (Acknowledgement to lawyers: There are both due process and commerce clause principles here, but the opinion does a mashup with them and admits they’re mashed.)
If I live in California and drive across the border to Oregon (which has no sales tax) to buy a book from an Oregon bookstore with the intent of taking the book back to my home in California to read and keep in my bookcase, is there any basis for California to collect a sales tax from the Oregon bookstore?
Even if the Oregon bookstore is right across the state line and has a big sign inviting visitors from California to buy books without paying sales tax, no one would contend the Oregon bookstore should pay a sales tax to California.
What am I doing if I sit in my home in California and order a book from Amazon?
If Amazon offered phone sales, I would place a call and speak with an order-taker in Washington. Since I’m using my computer, I’m electronically traveling to Washington and making a transaction on an Amazon computer sitting there. I’m buying a book in a Washington bookstore and paying for it there. As part of that transaction, I ask Amazon to give my book to UPS or Fedex, neither company related to Amazon, so one of these companies can bring the book I’ve purchased across the California state line to me.
PG will note in passing that one of the potential consequences this rule guards against is the likelihood that state legislatures will arrange taxes that overtax out-of-state businesses to provide competitive advantages for in-state businesses.
What about Amazon’s civic responsibility?
Amazon has a civic responsibility in Washington, where it has offices and employees and in other states where it has offices and employees. Just as a California resident doesn’t have a civic responsibility to pay taxes in Texas, Amazon doesn’t have a civic responsibility to pay taxes in California.
Where is the civic responsibility for these unpaid taxes? Every state that has a sales tax has a corresponding use tax in the same amount. If I live in California, purchase a taxable product and don’t pay California sales tax on it, I’m supposed to pay California use tax on it. Because I live in California, there’s a clear taxable connection between me and the state.
One question I never hear asked of any of the Californians or residents of other states who are complaining about Amazon not collecting sales taxes is whether these complainers have calculated and paid state use taxes on their purchases from Amazon since 1995.
Back to my original premise – Efficient and well-managed companies watch all of their costs very carefully. I doubt any of Amazon’s owners would suggest the company pay income taxes twice as large as it owes under federal and state law. So far as I know, Amazon pays all taxes it owes everywhere it owes them. Sounds like good civic responsibility to me. Because Amazon is well-run, it’s going to pay a lot more taxes in 2011 than Borders will.
Here’s a link to the most recent Supreme Court decision that directly addresses the issue these protest groups are raising.
How much money have the California Alliance for Retired Americans, the Health and Human Services Network of California, Health Access, the Western Center on Law and Poverty, the California Immigration Policy Center, the California Partnership and the Think Before You Click website people paid in the State of Washington in 2011 or the State of New York or the State of Michigan?
Michigan is certainly having financial problems. Wouldn’t civic responsibility dictate that all these groups pay some taxes to Michigan to help out the elderly and poor in that state?
Non-profit groups, you say? Oh, that means they don’t pay taxes to help the elderly and poor in California, Washington or anywhere else. Who could set a better moral example for Amazon?
Let’s move from legal principles to naked self-interest.
The only reason we have a jolly community of indie and almost-indie authors here at The Passive Voice is because Amazon made it easy for us to self-publish and sell on the world’s largest bookstore. Unlike almost every other bookstore on the planet, Amazon threw its doors open to indies. Others followed.
The only reason indie sales make it possible for some authors to live well from their indie royalties and many more to see a vision off in the distance of a time when they might be able to live from their indie royalties is Amazon set the standard of paying 70% or 35% royalties and most everybody else had to follow. These princely rates put some of the royal back in royalties.
We’re all familiar with what is happening to authors as traditional publishers are squeezed financially. They’re taking money from authors in the form of lower advances, low ebook royalties or maybe under-reported ebook royalties and indirectly through bare-bones marketing budgets.
What may we conclude might happen if Amazon is squeezed financially to the tune of 6-10% of its gross revenues for sales taxes?
Certainly, people who buy from Amazon would pay more, but Amazon doesn’t want to lose sales, so it will look to maintain price leadership by squeezing expenses down everywhere it can.
We would all like to think Amazon loves authors, but cynicism says they would squeeze their authors too – directly by reducing royalties to indie authors and indirectly by asking and obtaining a higher percentage of each book sale from publishers.
So, choose your alternative – high-principled constitutional law arguments or naked self-interest. PG likes both.