What do your 2010 online holiday shopping purchases have to do with the budget gaps many states are struggling to fill right now? In the eyes of some state and federal legislators, the sales tax that is not being collected by many online merchants is revenue that could help stem the bleeding of state treasuries.

What most shoppers don't know is that they should be paying taxes on most online purchases, even when the retailer doesn't collect.

Because of two decades-old Supreme Court decisions, a state cannot require "remote sellers" -- any business without a physical presence in that state -- to collect and remit sales tax. Despite this, sales tax is still due in most states, and it's the purchaser's responsibility to pay it.

In instances when online retailers don't collect sales tax, states require residents to calculate and remit the tax directly to their local taxing authority. When a sales tax is paid in this manner it's called a "use tax," and it's not new. Use tax laws have been on the books in most states much longer than the internet has been around, let alone "one-click" shopping.

Outside the halls of state capitols, Main Street is also feeling the sting.
"They can come in my store and look at it... they can touch it, they can feel it, but then they can go home and order it online... and not pay sales tax," says Kristin Kohn, owner of two brick-and-mortar stores in downtown Indianapolis. Kohn has found it increasingly hard to compete with out-of-state online retailers who aren't collecting the local 7% sales tax.

Kohn's story is all too familiar to Maureen Reihl. As vice president of government relations for the National Retail Federation, Reihl represents thousands of retail businesses, mostly traditional brick-and-mortar, but also online. "It's kind of an honor system," says Reihl, referring to the stance most states take when it comes to collecting use tax. "Some states have actually looked to try to require retailers to keep track of those things, or require you to keep track of those things. It becomes a privacy issue and a collection nightmare."

Texas, which has no individual or corporate income tax, sent Amazon.com a bill for $269 million at the end of last year. The bill was for sales tax that Texas believes Amazon.com should have collected between 2005 and 2009.

As America's largest online retailer, Amazon.com is at the forefront of the online sales tax fight across the country. The second biggest online retailer, with only a third of the sales of Amazon.com, is Staples.com. What about sales tax on Staples.com? Their disclaimer says it all:

"Staples charges sales tax on orders, based on the destination of the order, in accordance with state and local tax laws. Staples has a business 'presence' in each of the 48 states that we ship orders to, therefore we are required to charge sales tax based on the tax laws of that state." -- Staples.com

In July 2010, the Main Street Fairness Act was introduced into Congress to try and level the playing field. The bill, supported by the NRF, would have created a universal sales tax code and required remote retailers to collect those taxes for states who agreed to the tax rates set forth in the bill.

The argument is that by simplifying sales tax code (currently there are more than 7,500 different taxing jurisdictions, each with different tax codes), it would no longer be too onerous for remote retailers to collect sales tax -- something that the Supreme Court case, Quill Corp. v. North Dakota, held. The original bill never got passed, but similar legislation is in the works to be introduced in the current Congress.

As the National Governors Association's winter meeting convenes in Washington this weekend, brick-and-mortar store owners like Kohn are wondering if state legislatures will be able to do anything to help Main Street businesses compete with their online competitors.

Some governors are definitely aware of the situation.
Certainly, we want to think the transactions are equally taxed, said Missouri Gov. Jay Nixon. The evolution of commerce should not give advantage away from small businesses and towns that have bricks-and-mortars and pay bills and hire people.

When asked about the future of online sales tax in 2003, Amazon's CFO, Tom Szkutak, said that collecting sales and use taxes on behalf of states, municipalities and other taxing jurisdictions is inevitable, and it's certainly something we support doing -- provided that the process is drastically simplified.

 

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