It never made sense to exempt online retailers from collecting sales tax. It’s ridiculous now when so many states are in deep fiscal trouble. Illinois estimates that it is losing more than $150 million a year in uncollected taxes; California is losing an estimated $300 million a year. That would cover more than half the planned cuts for the University of California system.
It’s good news that states are using new legal tools to force Internet retailers to do what every other retailer must do. It is disappointing to see Amazon.com fight back.
Amazon and other Web retailers are shielded by a 1992 Supreme Court ruling that retailers could be required to collect sales tax only in states where they had some physical presence. Amazon has kept itself off the hook in several states using warehouses owned by subsidiaries.
That strategy is now being challenged. In October, Texas sent a $269 million bill to the company for four years’ worth of taxes, citing Amazon’s Texas warehouse, owned by a subsidiary. In South Carolina, Gov. Nikki Haley is reportedly reconsidering a deal cut by her predecessor that would allow Amazon to set up a warehouse there and exempt it from collecting sales taxes.
Last week, Illinois passed a law forcing online retailers to collect sales tax if they have local affiliates — local businesses, blogs or nonprofits — whose Web sites sent business their way in exchange for a cut. New York, Rhode Island and North Carolina have adopted similar laws, and New Mexico, Minnesota and Vermont are considering their own legislation. After Amazon threatened to terminate its affiliate programs in California and Hawaii, governors in both states vetoed similar bills. The California Legislature is trying again.
Amazon isn’t giving up. It is disputing the tax charge in Texas and said it will close the warehouse there. It challenged the New York law in state court and lost but is now appealing. It has terminated affiliate programs in Rhode Island and North Carolina and said it will sever its affiliate links in Illinois in April.
Collecting state taxes is not an unreasonable burden for online retailers. Amazon already collects taxes in five states, including New York, and it also collects taxes on behalf of physical retailers that sell through Amazon.
The best outcome would be for Congress to pass legislation requiring all retailers, online and off, to collect sales taxes everywhere they are due. In the meantime, states should not give in to Amazon’s pressure tactics.