Why Online Holiday Shopping Will Cost More This Year

If recent history is any guide, U.S. consumers will do more online shopping during next week’s “Cyber Monday” sales event than on any other day in history.  E-commerce is now a $300 billion business that has been growing by roughly 15 percent each year.  While most of its popularity comes from its convenience, the tax evasion opportunities made possible by the Internet (and a gridlocked U.S. Congress) have also helped tilt the playing field in favor of e-retailers.

For years, making purchases online was an easy way to avoid paying sales tax since most e-retailers refuse to collect the taxes owed by out-of-state customers.  When that happens, shoppers are supposed to pay sales taxes directly to the states in which they live, but such requirements are unenforceable and few shoppers actually pay the tax.  The result is a massive hole in state sales tax bases that has made raising state revenue for education, infrastructure, and countless other public services more difficult.

Recently, however, tax-free online shopping has become slightly less universal as the nation’s largest online seller—Amazon.com—has expanded its physical distribution network in a way that has brought it within reach of a growing number of state tax authorities.

In fact, this holiday season will be the first in which Amazon will be collecting sales tax in a majority of states.  As recently as 2011, Amazon collected sales tax from its customers in just five states: Kansas, Kentucky, New York, North Dakota, and its home state of Washington.  With the Oct.1 addition of Michigan to its tax collection list, that number now stands at twenty six states—home to 81 percent of the country’s population.

Our new, 20-second animated map provides an overview of how Amazon’s sales tax collection practices have evolved since the company’s first online sale in 1995:

Amazon’s (often grudging) expansion in the scope of its sales tax collection represents a modest step toward a more rational sales tax.  Taxing items that are purchased at traditional retail outlets while effectively exempting those bought over the Internet is unfair and unsustainable, especially as more and more consumers shift their purchases from brick and mortar retailers to online.

But despite the progress being made, there are still many cases in which e-retailers and traditional retailers are not competing on a level playing field.  Countless online retailers continue to skirt sales tax collection requirements in most states.  And even Amazon, despite its demonstrated ability to collect sales tax from most of its customers, is not collecting tax in 20 states and the District of Columbia (this count excludes the four states that levy neither state nor local sales taxes).  The result is that while most shoppers see sales tax tacked onto their Amazon purchases, about 17 percent of shoppers can still use Amazon.com as a means of evading (knowingly or not) their state’s sales taxes, and thereby reducing funding for education and other services in the process.

While most shoppers see sales tax tacked onto their Amazon purchases, about 17 percent of shoppers can still use Amazon.com as a means of evading (knowingly or not) their state’s sales tax.

While Amazon has arguably softened its opposition to sales tax collection in some instances, in others it has continued to pursue an aggressive avoidance strategy.  Specifically, the company has severed ties with businesses located in half a dozen states (Arkansas, Colorado, Maine, Missouri, Rhode Island, and Vermont) as a means of sidestepping laws that would have otherwise required sales tax collection, or additional reporting, on Amazon’s part.  As our animated map shows, the company also previously used this tactic in California, Connecticut, Illinois, Minnesota, and North Carolina before eventually reversing course and collecting sales tax, as well as in Hawaii where business relationships were terminated for a few weeks in a successful effort to pressure former Gov. Linda Lingle to veto an Internet sales tax enforcement measure.

Ultimately, a comprehensive solution will have to come from the U.S. Congress.  The federal government has the authority to require e-retailers to collect sales taxes in all of the states and localities where their customers are located.  In 2013, the Senate passed and President Obama supported legislation that would have done exactly that, but the House failed to act.  As of now it is unclear when Congress will take up the issue again, but until that happens, sales tax collection in the rapidly growing e-commerce sector will remain an indefensible patchwork.