Is the “Amazon Tax” Fair?
In search of new sources of revenue to cover state budget deficits, many states have started collecting an “Amazon Tax.” When Florida started collecting sales tax through Amazon on May 1st, 2014, it became the 21st state to do so. As more states force Amazon to collect sales tax, the corporation is seeing a
reduction in sales.
Amazon has long held a major advantage over brick-and-mortar retailers because, without sales tax, its prices were about 10 percent lower. Amazon was not required to collect sales tax because it had no physical presence in most states.
In accordance with the 1992 Supreme court ruling Quill Corp. v. North Dakota, out-of-state retailers must collect state and local taxes on orders shipped to in-state residents so long as they have a physical “nexus” in that state. While the decision applies to online retailers, the case was about an office supply company and had more to do with mail-in catalog orders than Internet retail.
The case was settled two years before Amazon’s founding, at a time when the commercial Internet was still in its infancy. Since 1992, online stores have taken off without physical counterparts, and the definition of nexus has become more far more complicated.
As with other companies, Amazon has always been strategic about taxes. Seattle was chosen for its headquarters so the corporation could sell to customers in California but not have to collect California’s steep state and local sales tax, which is now over 8 percent. Amazon customers in Washington State have always had to pay sales tax, but Amazon has spun off many of its operations in other states as separate entities from the sales operation—thereby avoiding any additional sales tax obligations.
To collect sales tax from Amazon, states have had to expand the definition of nexus. New York expanded it to include sales affiliates (companies that were paid a commission to link to Amazon). If the affiliate has physical presence in New York, they count as a nexus for Amazon. This definition has been upheld in the courts, and several other states have adopted legislation with this definition.
According to an NBER working paper by Brian Baugh, Itzhak Ben-David, and Hoonsuk Park of Ohio State University, Amazon’s business has suffered where it is forced to collect a sales tax. The study found households in states that had an online sales tax reduced weekly spending on Amazon by about ten percent compared to those in states that did not have the sales tax.
For online purchases the change was even more dramatic. Sales fell by 24 percent for purchases of more than $300.
This is troubling for Amazon, and also troubling for states trying to increase revenue. Each year states lose an estimated $23 billion in collected sales taxes from web retailers. Amazon is an easy target because it is the biggest web retailer and has an infrastructure capable of handling sales taxes for thousands of jurisdictions. However, as Baugh, Ben-David, and Park show, when customers are forced to pay sales tax on Amazon, they are more likely to make purchases elsewhere online and keep the tax savings.
While the NBER study found that there was only a two percent increase in sales for brick-and-mortar retailers when Amazon introduced a sales tax, there was a 20 percent increase for competing online retailers. Amazon features many of its competitors on its own site through Amazon Marketplace. These companies pay Amazon a fee, and they can sell their products through the Amazon website. For items over $300 there was a 61 percent increase in purchases from Amazon Marketplace after Amazon sales tax collection. This means that when shopping on Amazon consumers can still buy the same products and avoid sales tax just by making a couple of extra clicks.
By forcing Amazon to collect sales tax through odd loopholes and strained definitions, states are penalizing Amazon for its success and giving its business to online retailers that do not have to collect sales tax. Even before Amazon, consumers crossed state lines to pay lower sales tax. The Internet has reduced this to a well-placed Google search. One common-sense solution for this issue would be for states to simply lower their sales tax rates and tax all online sales. Consumers would then have less incentive to find tax-free sites.
While collecting sales tax from multiple states may not seem that difficult in the age of high-tech computing, there are thousands of separate sales tax jurisdictions that must be accounted for at the county and local level. In order for more companies to be able to collect sales tax online, state sales taxes need to be drastically simplified.
The Marketplace Fairness Act, sponsored by Rep. Steve Womack (R-AK) and Michael Enzi (R-WY), creates a more cohesive framework for online sales tax collection. The MFA would enable states to require remote sellers to collect sales tax, but only after states simplify their sales tax policy to make collection feasible. States would have to establish a uniform sales tax base for use through the entire state and providing free software to retailers for managing sales tax compliance. Small online retailers would still be exempt, but by simplifying base rates and providing software, more companies would be able to collect sales tax online.
In order for the Marketplace Fairness Act to be revenue neutral, states should reduce their sales taxes by the amount they anticipate collecting from online retailers.
In the 21st century, with commerce increasingly shifting online, the tax code should reflect technological progress. Simplifying tax codes so it is possible for more companies to collect sales tax is one way of doing this. Targeting successful companies to cover up state budget shortfalls is not.
Neil Deininger is a student at American University and an intern at Economics21.
Interested in real economic insights? Want to stay ahead of the competition? Each weekday morning, e21 delivers a short email that includes e21 exclusive commentaries and the latest market news and updates from Washington. Sign up for the e21 Morning eBrief.