Should Internet Sellers Be Forced To Collect State Sales Taxes?

By Joe Waynick

booksellers collecting sales taxInternet retail giant and the state of California have been locked in legal combat the past few months because state lawmakers want the retailer to begin collecting state sales taxes on Internet sales made to California residents.

Under federal law states can only require companies to collect sales taxes if they have a physical presence, thanks to the landmark Supreme Court decision known as Quill vs. North Dakota regulating interstate commerce.

At the center of the controversy is a nebulous concept known as “nexus” which is the benchmark as to what constitutes a physical presence in a state. Traditionally, a physical presence has been defined as a brick-and-mortar operation.

However, cash-strapped states have sought to broaden the definition of nexus to include marketing affiliates who solicit business on behalf of Internet companies doing business across state lines.

Winners and Losers

The liberal interpretation of the commerce clause by state legislatures can mean the end of a perceived economic competitive advantage held by Internet retailers such as and over brick-and-mortar retailers that amounts to as much as 10% of the sales price of goods and services sold online.

In addition to losing a price advantage, Internet sellers will be forced to foot the bill for collecting Internet sales taxes encompassing a dizzying array local sales tax laws in all 50 states. Such costs would further close the competitive gap between Internet sellers and their physical counterparts. Some Internet sellers even argue the tables would be turned in favor of brick-and-mortar retailers because local business only have to collect taxes for one state whereas online businesses would be required to collect taxes in every state.

National brick-and-mortar chain Wal-Mart and Target support the so-called “Amazon Tax” laws because they say Internet retailers have an unfair advantage. State lawmakers point to the chains as proof the new taxes are justified.

Internet Sellers Fight Back

Internet retailers are not taking the new rules laying down. Amazon collects sales taxes on Internet sales in five states where they have stores or offices. However, when faced with the prospects of collecting sales taxes in ten states claiming affiliate nexus, Amazon has terminated Amazon Associates contracts with tens of thousands of independent online sellers.

At stake are billions of dollars in uncollected revenue across the nation that could be funneled to desperate state coffers. The Los Angeles Times reports that affiliate agreements cancelled by Internet retailers will cost the state of California alone more than $152 million per year in lost tax revenue. Many affiliate sellers who depend on their Internet income have vowed to leave states passing Internet nexus laws, further depressing local economies.

Furthermore, Amazon has filed a lawsuit against the state of New York claiming its nexus laws are unconstitutional because they violate the interstate commerce clause of the constitution. It’s expected that the case will wind up in the United States Supreme Court.

Will Cooler Heads Prevail?

There appears to be widespread support for a national tax on Internet sales that would be simple to implement and maintain. Such a tax would level the playing field between Internet retailers and brick-and-mortar stores. The national tax is supported by sellers on both sides of the issue.

If new federal laws are passed that can pass constitutional muster, then states will receive much needed new revenue, physical retailers will be more competitive, and Internet retailers will no longer have to face the uncertainty and burdensome costs of tracking and administering 50 different tax collection laws to comply with state regulations. A simple solution is seen as a benefit to all parties concerned.

One thing is for certain, the outcome of this battle will definitely change the face of the eCommerce landscape for good.

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Joe Waynick is author of “Internet Bookselling Made Easy! How to Earn a Living Selling Used Books Online” (ISBN 978-0983129608). You can reach him at: Internet Bookselling Mentor.

4 thoughts on “Should Internet Sellers Be Forced To Collect State Sales Taxes?”

  1. I sniffed a loaded question in the wording: Should Internet sellers be FORCED?

    (1) No one forces anyone to go into business in the first place.
    (2) Internet sellers have many other advantages over bricks-and-mortar stores Here’s a short list: (a) They don’t have to keep shop hours. (b) They don’t have to pay staff. (c) They don’t have store overhead. The list goes on and on.
    (3) Given the sophisticated programs on which Internet sellers already rely, it is hard to believe that the “dizzying array” of varying sales taxes across the country would not be instantly automated and calculated on the respective selling platform.
    (4) “FORCED to foot the bill”? Again, no one forces anyone to be in business. Being in business has always involved costs.

    Is the real problem here that too many Internet sellers–not to name any specific platforms here; use your imagination–are not reporting income or paying income tax and that collecting, reporting and paying sales tax would blow their cover? I wonder.

  2. My mentor hated book collectors and lambasted anyone who had the temerity to describe themselves as such (he believed books were meant to be read) but he passed away before the internet helped create another job? description for people who have a need to think they are smarter than anyone else.
    Before then it was mostly the antiquarian dealers who occupied that mindset and scoured the shelves of merchants like my mentor and myself.
    Now it is almost anyone who collects anything and they add them to an evergrowing hoard of treasures their children will eventually give away for nothing. Justice often prevails.

    I’m for anything that will cut down on the number of skulkers who rob my regular customers of bargains they might actually read. The triumphant flush on their faces when they are successful (at the cost of my customers) is repugnant to me.

    The thought that any of them could actually earn enough to qualify to (even if some of them don’t) pay taxes is worrying.

  3. The concern I have with the government interfering in yet another area of life, is the little people who sell stuff online will end up being the ones that foot the tax bill, as it does in real life.
    There’s no way amazon, and B&N and all those other huge corporations will end up paying practically anything, if corporations with glass and cement buildings are any example to go by. They pay virtually nothing in taxes– at least in income. I’ve no idea what they get away with in regards to sales tax. So, people like myself and others will have to figure out what to charge state by state, something we don’t have sophisticated programs for, and that will hurt what pathetic sales we barely get now. Because if they have to pay sales tax online as well as off, customers may stay away from the handcrafted artisans that can only sell their wares online. I knew this day would come though, nothing the government hates more than something unregulated by itself. LOL.

  4. “(2) Internet sellers have many other advantages over bricks-and-mortar stores Here’s a short list: (a) They don’t have to keep shop hours. (b) They don’t have to pay staff. (c) They don’t have store overhead. The list goes on and on.”

    Delayed reply since I just saw the article, but I can’t let this comment go past.

    This was clearly written by someone who has never run an online business (book or otherwise). Assuming that a business, any business, doesn’t have to keep hours, pay staff, and don’t have overhead is just plain stupid.

    Perhaps you mean “individuals who sell books and merchandise through amazon” instead of “internet sellers”?

    Websites, and particularly complex ecommerce applications, don’t build themselves nor cost nothing to run and maintain. The overhead to run a large ecommerce site can easily outrank even the largest brick and mortar bookseller (the last midsized ecommerce site I worked for consumed an easy $50,000 per month just to keep the servers alive – factor in another 10 FTE for development and operations staff, plus packers, shippers, warehouses, offices, and we haven’t even thought about administrative overhead, purchasing, software licensing, advertising…..)

    FWIW and all of that. But even individual booksellers who sell via amazon/abe/etc have overhead – it’s just different (and their volume of sales is different) from a brick and mortar bookshop.

    ..david (technical consort & financier for a brick and mortar book store opening 1st quarter of 2012)

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