WASHINGTON — Local governments in seven states are not getting a share of the sales taxes Amazon is collecting for e-commerce transactions because of gaps in state and local laws, according to a report by the Institute on Taxation and Economic Policy.
Amazon began collecting sales tax in all 45 states that have statewide sales taxes as of last April following a gradual roll out. The company did not respond to a request for comment on the report.
The cities affected range from Birmingham, Montgomery, Mobile and Huntsville in Alabama to Philadelphia and Pittsburgh in Pennsylvania.
Besides Alabama and Pennsylvania, the seven states include Alaska, Idaho, Iowa, Mississippi and New Mexico.
The report highlights how lacking federal, state and local laws are if the U.S. Supreme Court rules in favor of South Dakota in its case against Wayfair Inc. and other e-commerce retailers seeking to enforce state laws requiring collection of state sales taxes by out-of-state companies.
South Dakota v. Wayfair, Inc. will be argued before the Supreme Court on April 17, with a ruling expected around June.
“In order for sales taxes to be collected comprehensively on online sales, we really need policy change at all levels of government — federal, state and local,” said Carl Davis, author of the ITEP report.
The court is widely expected to overturn its 1992 ruling in Quill Corp. v. North Dakota, which upheld earlier rulings limiting states and localities to collecting sales taxes from retailers with a physical presence in their jurisdictions.
The 1992 ruling involved mail-order catalogs at a time when public usage of the internet was in its infancy.
“Overturning Quill will be the first step in allowing state and local governments to collect the billions in owed tax dollars from internet retailers,” said Amanda Kellar, associate counsel and director of legal advocacy for the International Municipal Lawyers Association. “But after that hopefully happens, there still may need to be legislative solutions either by Congress or in individual states to help local governments collect tax revenue.”
Lisa Soronen, executive director of the State and Local Legal Center, said the new ITEP report “illustrates that some work may need to be done at the state and local government level to make sure local governments are able to collect all money owed.”
“Perhaps it is not surprising that all this work hasn’t been done so far because vendors like Amazon aren’t currently required to collect taxes where they don’t have a physical presence,” Sorenen said.
A bipartisan effort by some lawmakers in Congress to address the problem through legislation has been thwarted by House Judiciary Chairman Bob Goodlatte, R-Va.
Two bills — the Senate’s Marketplace Fairness Act and the House’s Remote Transactions Parity Act — would require e-commerce retailers to collect sales taxes based on the location of the purchaser. The bills also would require states to either join the Streamlined Sales and Use Tax Agreement compact or agree to implement certain sales tax simplification measures.
Twenty-three states have adopted the streamline sales tax compact which minimizes the cost of compliance by out-of-state retailers by providing for administration of collection of the sales taxes at the state level, simplification of tax rates and uniformity of the definition of which merchandise is taxable.
But even if federal legislation is enacted, other problems will remain.
Pennsylvania and New Mexico, have state laws that require “origin-sourcing,” which means a retailer must have a physical presence in a jurisdiction in order to be able to collect sales taxes. Amazon does not have any fulfillment centers in Philadelphia or Allegheny County, which includes Pittsburgh.
Amazon is remitting the statewide sales taxes it collects to state governments, but there are obstacles to getting the local share to the cities and counties which have local levies in several states.
Alaska, for instance, does not have a statewide sales tax, so there is no mechanism at the state level for collecting or distributing sales tax revenue to the 107 jurisdictions, such as the city of Juneau, that do have one. Davis, the author of the report, said Alaska state officials could enact a remote sales tax reporting law similar to Colorado’s that would require e-commerce companies to remit local sales taxes.
“From a policy perspective, the setup right now really is a lose-lose-lose for these cities,” Davis said. “It’s bad for their economies to not require out-of-state retailers to collect. It’s obviously bad for city services because they are not getting that revenue and it’s obviously unfair to shoppers who like to shop local who have to pay a local tax that online shoppers do not.”
Chicago receives local sales taxes from Amazon, Davis said, based on his spot-check of its website.
But the state of Illinois doesn’t require local sales tax collection by e-commerce companies that don’t have a physical presence in the state.
“Companies based outside Illinois are being advised accurately by sales tax filing services that they only need to collect the state-level tax,” Davis said. “The local tax cannot be collected by those companies because of the current setup of Illinois law. There’s been a little bit of discussion about this, but not the amount I think is warranted given how close we are potentially to a major federal policy change.”