We retired Tax Justice Blog in April 2017. For new content on issues related to tax justice, go to www.justtaxesblog.org
UPDATE: A new post on this topic is available here.
This holiday season, the media will cover throes of consumers who will wait in line for door-buster specials, but a large and growing number of shoppers will opt to avoid the crowds by making their purchases over the Internet.
For Amazon.com customers, this used to mean additional “discounts” because while shoppers have always owed sales taxes on their online purchases, the company didn’t bother to collect the tax in most states. In fact, as recently as 2012, the bulk of American consumers lived in states where Amazon.com refused to collect sales tax. The practical result was an automatic price advantage of around 5 or 10 percent (depending on each state’s sales tax rate) for the e-retailer, and less money in the coffers of state and local governments.
But Amazon.com’s sales tax collection practices have changed dramatically in the last five years. As of 2016, the company collects sales tax from its customers in 29 states, including 19 of the 20 most populous states in the country. Altogether, about 86 percent of the U.S. population lives in states where Amazon.com collects sales tax.
This change, unfortunately, isn’t due to the company seeing the error of its ways.
Thanks to a decades-old Supreme Court case, e-retailers operating outside of a state’s borders cannot be compelled to collect the sales taxes owed by their customers. For years, Amazon.com took advantage of this provision. In fact, in 2011, the nation’s largest e-retailer collected sales taxes from its customers in just five states, home to 11 percent of the country’s population.
This recent change in Amazon.com’s tax collection practices is a side effect of its effort to cut down on delivery times by opening distribution centers near its customers. As the company expanded its physical footprint to more states, it has increasingly lost the ability to hide behind its out-of-state status as a way of avoiding sales tax collection requirements. The result is a somewhat more rational application of the sales tax in most states: today most Amazon.com shoppers are paying the same sales taxes as their neighbors who prefer to shop at local “brick and mortar” stores.
But the march toward a more reasonable sales tax is far from over. Online shoppers can still evade the sales tax by buying from smaller e-retailers that lack a physical presence in their state. And even Amazon.com, despite proving itself capable of collecting sales tax from the vast majority of its customers, is refusing to participate in the sales tax collection systems of 17 states where it lacks a physical presence: Alaska, Arkansas, Hawaii, Idaho, Iowa, Louisiana, Maine, Mississippi, Missouri, Nebraska, New Mexico, Oklahoma, Rhode Island, South Dakota, Utah, Vermont, and Wyoming. (The company also does not collect tax in Delaware, Montana, New Hampshire, and Oregon since these states lack a state or local-level general sales tax.)
As we explain in an updated policy brief, the sales tax collection practices of e-retailers will remain a messy patchwork until the federal government gets involved. That involvement could take the form of legislation allowing states to require sales tax collection by out-of-state e-retailers. Or it could come through a future decision by the Supreme Court to expand the circumstances under which states can require sales tax collection. While some holiday shoppers may not like it, either of these outcomes would bring about a major improvement in the enforcement of our state and local sales tax laws.