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Sales tax collection on online purchases: legislation to ease it, lawsuit to stop it

Sales taxes on online purchases have always been problematic.

For years, states have been working to get a critical mass of members in the Streamlined Sales and Use Tax initiative (SSTI).

Basically, this multistate group wants to create a nationwide system that makes it easier for the more than 7,500 taxing jurisdictions across the United States to collect their appropriate sales taxes on products purchased from "remote sellers," or what you and I call Internet and catalog vendors.

While the SSTI is a state-driven effort, it still needs federal intervention.

That's because the 1992 Supreme Court decision that ruled on the circumstances under which a state could collect such sales taxes (more on this in a minute) also said that under the U.S. Constitution's commerce clause, only Congress can require all retailers to collect sales taxes.

Man Shopping on the Internet

Now the SSTI is getting another shot at approval from Washington, D.C., to collect sales taxes from remote sellers as well as from those literally down the street.

Rep. William Delahunt (D-Mass.) has introduced H.R. 5660, the Main Street Fairness Act. It would let  states which are members of the SSTI (there currently are 23) collect sales taxes from online sellers. A similar bill is expected to be introduced shortly in the Senate by Sen. Mike Enzi (R-Wyo.).

All those opposed … : Brick-and-mortar store owners have long contended that they can't compete with online and catalog sellers who don't collect state sales taxes. Naturally, these folks and their industry groups are fully behind the the Main Street Fairness Act.

But there's plenty of opposition, too. And some of it has headed to court to fight the state tax collection tactic.

Eighteen years ago when the Supreme Court looked at the issue of sales taxes on remote vendors, it decided that states could collect from the businesses as long as the seller had some sort of physical presence, or nexus, in the state.

For the longest time, nexus was usually a warehouse or an actual outlet store. That's why here in Texas, when I buy an item from Amazon, the online book selling giant's distribution center outside Dallas means that the company must collect the Lone Star State's 6.25 percent sales tax on my purchase.

Some states, however, have turned the tables on the online commerce that's caused them such tax collection woes. They are using the origination point of Internet sales to expand the definition of nexus.

They point to websites and blogs operated by residents in their states that have ads from such out-of-state retailers. The prime example is the Amazon affiliates program, through which these in-state bloggers get a commission when folks click through those ads to the Seattle-based retailer's store and buy the advertised items.

These affiliates, contend state tax collectors, therefore provide sufficient nexus for sales tax collection on all of Amazon's sales in their states.

Although the states are using similar circumstances for all sorts of online sellers, the collection has been dubbed the Amazon tax.

In the latest battle between states and online retailers, the New York-based Direct Marketing Association (DMA) has filed a federal lawsuit to overturn Colorado's so-called Amazon tax which took effect March 1.

The lawsuit , filed in U.S. District Court for Colorado in Denver, challenges provisions of the law requiring online retailers to report to the Colorado Department of Revenue what consumers owe in sales and use taxes from previously untaxed online sales.

Among the reasons that the DMA says the Colorado law should be overturned are that it:

  • Discriminates against interstate commerce;
  • Exceeds the permissible scope of state regulatory authority over out-of-state companies;
  • Violates the right to privacy of Colorado consumers; 
  • Infringes upon the free speech and due process rights of both consumers and retailers; and
  • Exposes confidential consumer information to the risk of unauthorized disclosure.

Which of these dueling out-of-state sales sales tax efforts will be resolved first?

While there's some indication that members of Congress, under growing pressure from cash-strapped states, might actually advance the online sales tax measure this time, I'm betting on the court system to provide its answer more quickly.

Are you an Amazon affiliate or were you one since the company has halted the program in some states after they enacted similar taxes? Does or did the lack of sales tax collection play a role in your decision on where to buy a product?

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online business system

Sales taxes on online purchases have always been problematic. This is certainly true. The fact that it never erases itself as an issue since responsive action never seems effective.

Willard Harrison

I am a retired person on fixed income who is trying to make ends meet financially by selling my long time collection of fishing lures. I have had customers in nearly every state and Japan, Great Britain, Australia, New Zealand, Scotland, Germany, and several smaller countries. If I am required to adhere to sales tax laws of each state I will be forced to either break some laws or stop selling on e-Bay and therefore decrease the income tax I will pay!! Please stop trying to stop free enterprise!!

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