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States Renew Efforts to Collect Taxes From Internet Sales

19 Mar, 2010 By: Chris Tribbey

As states continue to seek ways to make a dent in massive budget shortfalls, more and more are looking at the potential for sales taxes from Internet retailers such as Amazon.com.

In February, Colorado was the latest state to pass such a law, becoming the fourth in the country to do so (after New York, Rhode Island and North Carolina).

All the state laws aim to skirt a 1992 Supreme Court ruling that found retailers could not have taxes imposed on them unless they had a significant physical presence in the state collecting the tax. The state laws get around that by establishing a retailer’s presence in the state by the advertising of their business in the states.

California and Virginia also recently made headway toward passing similar laws, and another half-dozen states are looking at similar legislation as well.

The California law, which is still winding its way through the state legislature, would raise tens of millions, a small amount considering the estimated $20 billion or more budget gap California needs to close through 2011.

That’s the problem with these new so-called “Amazon” taxes states are passing, according to Steve DelBianco, executive director of NetChoice, a coalition of trade associations, businesses that operate over the Internet, and online consumers.

“It's natural for states to look for revenue in the area of uncollected sales tax, but there's a lot less revenue there than they think,” he said. His group estimates that uncollected sales tax from Internet transactions worked out to $4 billion total in the United States in 2008, or “less than three-tenths of 1% of state and local tax revenue.”

“The present patchwork of 8,000 sales tax jurisdictions with different rates and rules is an unreasonable burden on interstate commerce,” DelBianco said. “So end-runs around these rulings are not likely to succeed, unless states truly simplify their sales tax systems and compensate sellers for the burdens of collecting.”

In each state where a new Internet sales tax law has passed, Amazon has ended its affiliate program there. New York was first in 2008 (Amazon is currently in court with New York over the legislation). The affiliate program allows Web site owners to link to Amazon and earn up to 15% for referral purchases. Colorado passed its Internet sales tax law in February, and shortly after Amazon severed ties with its associates there.

“Regrettably, as a result of the new law, we have decided to stop advertising through associates based in Colorado,” Amazon reportedly wrote to its Colorado affiliates. “We plan to continue to sell to Colorado residents, however, and will advertise through other channels, including through associates based in other states.

“There is a right way for Colorado to pursue its revenue goals, but this new law is a wrong way.”

Colorado Gov. Bill Ritter slammed the decision, saying in a press release that Colorado residents “deserve better.”

“Amazon has taken a disappointing – and completely unjustified – step of ending its relationship with associates,” he said. “While Amazon is blaming a new state law for its action, the fact is that Amazon is simply trying to avoid compliance with Colorado law and is unfairly punishing Colorado businesses in the process.”

The Tax Foundation, a nonpartisan tax research group based in Washington, D.C., released a report this month that found that states that have passed such laws have not seen any new revenue.

“Contrary to the claims of supporters, Amazon taxes do not provide easy revenue,” the report reads. “In fact, the nation’s first few Amazon taxes have not produced any revenue at all, and there is some evidence of lost revenue. For instance, Rhode Island has seen no additional sales tax revenue from its Amazon tax, and because Amazon reacted by discontinuing its affiliate program, Rhode Islanders are earning less income and paying less income tax.”

Other states are taking a different tact when it comes to collecting online sales tax. On March 18 Idaho barely rejected a bill that would have made it the 24th state conforming to the Streamlined Sales Tax Project. The Project, based out of Nashville, Tenn., is signing up both states and retailers in hopes of simplifying tax codes for Internet sales, and making the issue a federal one.

Scott Peterson, the group’s executive director, said he believes the state-by-state laws are not effective.

“We will have to wait for the courts to determine whether this particular method will be successful in getting sales tax collected,” he said. “With Internet retailing growing at a rate much greater than total retailers, the amount of uncollected sales tax will certainly increase. No one should be surprised that states are doing whatever they can to stop an increase in their sales tax gap.

“We are not surprised that states are doing whatever they can to eliminate that tax gap. However, we believe our approach is going to be more effective.”

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