WASHINGTON — States are ramping up pressure on online-only retailers to pay billions of dollars in state sales taxes, hoping the funds will help bring their tax collections into the 21st century.
The rise of e-commerce has led to a tectonic shift in consumer spending that is eroding state sales taxes. Music, books and movies purchased online often dodge the state sales tax a customer would typically pay if the product were purchased as a “good” at the mall.
State and local governments will lose an estimated $23.3 billion in unpaid sales taxes in 2012, according to the National Conference of State Legislatures. In Washington, for example, the Department of Revenue estimates about $1 billion will go uncollected during the 2011 to 2013 biennial budget cycle.
Now, both conservative and liberal state legislatures are voting to require online-only retailers like Amazon.com LLC, Overstock.com Inc. and eBay Inc. to pay state sales taxes for Internet purchases. The businesses are not capitulating and are threatening to withdraw from states that impose online sales tax collection, pulling out desperately needed jobs.
The battles have set off a lobbying spree and have thrown entrenched political alliances askew. In South Carolina last week, some conservative Republicans voted to reject a tax break for Amazon that would not apply to traditional stores, while liberal Democrats voted in favor of the company’s tax break to protect jobs.
Meanwhile in Congress, Sen. Richard Durbin, D-Ill., is expected to soon introduce a bill called the Main Street Fairness Act that would authorize states to collect online sales taxes from companies that do not have a brick-and-mortar presence in the state. Under a 1992 Supreme Court decision in Quill Corp. v. North Dakota, states have no authority to collect sales taxes from businesses that do not have a physical presence in a state.
The concept of Durbin’s legislation is not new. For more than a decade, Congress has failed to pass online sales-taxing authority for states. But government groups are eager for the legislation now because the revenues could be used to plug budget holes opened by the loss of federal stimulus aid in fiscal 2012.
“There is a direct correlation between getting money you are owed and helping alleviate some of the stress on your budget,” said David Quam, director of federal relations for the National Governors’ Association, one of the state and local groups backing Durbin’s legislation. “If that dollar comes in, that’s a dollar you don’t have to cut somewhere else.”
State Sen. Richard Moore, D-Mass., and president of the NCSL, said Durbin’s legislation would provide federal help to states without federal dollars.
Massachusetts’ “tax revenues are improving but the hole we’ve got in our budget is because the federal stimulus money is ending,” he said, adding that Durbin’s bill would “fill that hole with money not coming out of the federal Treasury.”
Massachusetts sales tax “erodes every year as more people buy stuff online,” Moore said, and as a result, “the buying power of the sales tax is minimized.”
Massachusetts, like other states, issues municipal bonds backed solely by sales tax revenue. One cent from the state’s 6.25% sales tax is dedicated to bonds issued for school construction. With sales tax revenue from online purchases, Massachusetts could finance more projects with sales tax bonds, Moore said.
The Durbin legislation is crucial because a state-by-state approach to collecting online sales taxes will not work, Moore and other sources said. For states that have passed laws requiring online retailers to collect sales taxes, the companies have departed the state, either by cutting ties with affiliated businesses that sell their products on the companies’ websites or by closing distribution centers. The states risk losing jobs associated with these ties when the online retailers pull up their roots.
The online retailers will find safe-haven states to operate distribution centers and work with affiliates, according to sources. The Durbin legislation is needed to give states that have sales taxes the authority to collect from online retailers, they said.
In an interview, Jonathan Johnston, president at Overstock, said the company “will always terminate our affiliates in any states that pass” online sales tax laws. The company has cut ties with affiliates in Illinois, New York, Rhode Island, North Carolina and Arkansas, he said.
In these states, Johnston argued that Overstock does not use the states’ resources — it has no employees or distribution centers in these states — and therefore should not have to pay taxes for their services.
“It’s almost like taxation collection without representation,” he said. “States have been fiscally imprudent and have dug themselves into huge holes. I think if they had been more prudent in having managed their businesses, they wouldn’t be in this situation.”
Amazon and eBay did not respond to requests for comment.
The battle climaxed in one state last week. The South Carolina House rejected a tax break for Amazon that exempted the company from collecting sales taxes on purchases made within the state. The state Senate Finance Committee had approved the tax break earlier in the April.
Amazon was building a distribution center near Columbia, South Carolina’s capital. After the vote, Amazon said it would close the facility, wiping out about 1,200 of jobs planned for the center.
The state’s Republican-controlled House voted down the tax break in part because they did not want the company to get a special tax break over conventional stores, said Rep. Gilda Cobb-Hunter, D-Orangeburg.
Cobb-Hunter said she voted for the tax break because Amazon’s distribution center would have created jobs in Orangeburg County, which had a 13.2% unemployment rate in March, according to the Bureau of Labor Statistics. “For me, the bottom line was employment,” she said.
The $3 million in estimated tax revenue Orangeburg would collect from the Amazon tax was outweighed by the economic benefit provided by Amazon’s facility, she said. The lobbying before the vote was intense, according to Cobb-Hunter. Wal-Mart Stores Inc. “had a ton of lobbyists and [television] commercials” calling for an end to the Amazon tax break, she said.
A spokesperson for Wal-Mart directed questions to the Alliance for Main Street Fairness, an advocacy group that has supported online sales tax collection. Wal-Mart is a member of the group.
Cobb-Hunter said she thinks Amazon will move the distribution center to another state “willing to make the concession.”
Other states have ratcheted up the heat on online retailers. In Texas, Comptroller Susan Combs last year sent a bill to Amazon for $269 million in uncollected sales taxes from 2005 to 2009. Amazon said in its first-quarter earnings statement last week that the Securities and Exchange Commission is looking into the matter, adding that the company will “vigorously defend” itself. A spokesperson for Combs last week confirmed the state’s audit remains outstanding.
The reason states struggle to collect online sales taxes dates back to the Supreme Court’s Quill case. In their decision, the justices ruled it was too complicated for businesses — specifically mail- and phone-order companies — to pay sales taxes in the thousands of unique taxing jurisdictions nationally. If a business did not have a physical presence in a state, like a store, it did not have to collect and remit sales taxes there, the high court said.
The South Carolina situation boiled over because Amazon was building a distribution center in the state, thus establishing a physical presence. The company needed the state to specify the distribution center would not be considered “nexus,” or a physical location that would require Amazon to collect and remit sales taxes.
Other states have used a different tactic to get around Quill. In Illinois and New York, lawmakers have tried to prove the online retailers’ affiliates, the small businesses that sell goods through the companies’ websites, serve as a physical presence. Amazon is paying New York sales taxes, but the company has sued the state over the issue. Amazon cut its ties with Illinois affiliates in April.
But the Quill decision said Congress has the power to authorize states to require the businesses to collect and remit sales taxes. This prompted states to get organized, and in 2000 the Streamline Sales Tax Governing Board Inc. was formed.
Today this coalition has 23 member-states. The Durbin legislation would grant the coalition the federal authority it needs to require the online retailers to collect and remit sales taxes.
However, the Durbin bill could face resistance in Congress if it is framed as a tax hike.
“You may be sure that this year there will be many who will try to characterize this as a tax increase,” said Frank Shafroth, director of the State and Local Government Leadership Center at George Mason University. The economic shift to services away from goods represents “a huge erosion” in tax revenues, he said.
