Business Ethos Blog

Taxing Online Sales

To date online sales have been “tax free” unless you are located in the state that the company is located.  Of course, it is really not tax free as you are required to pay the sales tax when you file your state income tax return—of course you keep track like I do and pay the tax then.  It has always been the thought that keeping online sales tax free would promote the growth of online and provide start-ups to have a pricing advantage.  Why the change and what is the “Right Thing to do?”


Here are some issues to consider:

1. We are hearing more and more that companies like Best Buy and Lowe’s are losing sales due to the sales tax difference.  Customers visit stores, find the model they like and then purchase from someone else online.

2. Republicans have basically opposed taxing online sales because it would be a tax increase–and their platform in general is no tax increases.

3.  There was a recent battle in California with Amazon.  California was to impose sales taxes because Amazon has a physical presence in California.  Amazon threatened to close down operations there to avoid the sales taxes.

4.  A 1992 Supreme Court ruling said that online companies would not have to collect sales taxes unless they had a physical presence in the state the customer lived.  The onus is on the companies to collect the taxes–this freed them from that requirement.

5. Republican Governor Chris Christie of New Jersey is close to a deal with Amazon to have Amazon collect sales taxes in exchange for incentives to locate a distrbution center in the state and a delay to start the collection until July 2013.

6.  Almost all states have revenue (note revenue, not spending) problems and can use the increased sales taxes on the $200 billion in online sales.  It is estimated that states would increase revenues by about $23 billion.

7. Amazon now supports the federal legislation to allow sales tax collection in all states.  Most other online retailers oppose the legislation.  The biggest impact will be on small businesses that may have to deal with 50 state sales tax laws and filings.

What is the “Right Thing to do?”

The online industry has grown considerably and is no longer a fledgling industry.  The giants like Amazon no longer need a competitive advantage of no sales tax.  However, I do feel that many of the small companies could become overburdened with new collection and reporting requirements—not that they need the pricing advantage, but their costs will certainly escalate.  I also have sympathy for the brick and mortar stores that serve as showcases for other online retailers.  It is time to level the playing field, the no sales tax law is one more indirect government subsidy.  The right thing to do is pass legislation to tax all online sales.  The Republicans can say it is not a tax increase or new tax—it is just collecting taxes that already exist.