Jeff Gelles: Time may be here to collect sales tax on Internet shopping

Sanjay Shah, general manager of Amazon's new Chattanooga, Tenn., fulfillment center, left, talks with Gov. Bill Haslam during a tour of the facility on Thursday.
Sanjay Shah, general manager of Amazon's new Chattanooga, Tenn., fulfillment center, left, talks with Gov. Bill Haslam during a tour of the facility on Thursday. (DOUG STRICKLAND / Chattanooga Times Free Press)
Posted: February 16, 2012

Is it time for Internet retailers - companies like Amazon, Overstock, and eBay - to finally abandon the idea that Web sales should take place free from the burden of collecting state sales taxes?

That's a question that arises today thanks to two decades of policy-by-inaction - a strange soup of federal court decisions, conflicting state policies, and Internet boosterism. For all those years, policymakers have been so eager to nurture Web commerce as an engine of economic growth that they've dodged dealing with a basic inequity.

But now some are saying that we've reached a tipping point - a time when bricks-and-mortar stores and state coffers plainly need help more than Internet start-ups.

That argument is made with growing urgency by groups such as the National Retail Federation, which has called for a level playing field since the late 1990s. It's being pushed by a coalition of big-box stores that calls itself, ironically, the Alliance for Main Street Fairness. And it's behind a fight by the New Jersey Retail Merchants Association against a 22-month sales-tax exemption sought by Amazon as a quid pro quo for building two new warehouses in the Garden State.

It also underlies Pennsylvania's new push to collect taxes directly from consumers for online purchases. For the first time, Pennsylvanians filing income-tax returns for 2011 are being asked to declare how much they owe for their out-of-state purchases.

How did we get to this confusing juncture? Oddly enough, it's mostly a matter of coincidence.

Let's start with this: Whatever you may think, Internet sales aren't sales-tax-free, and never were. Nor were catalog or TV-shopping purchases before them. But it's never been easy for states to impose tax-collection rules on far-off companies - or, for that matter, to reconcile the differences between their own idiosyncratic laws.

In 1992, with the Web still in its infancy, the U.S. Supreme Court ruled that, without action by Congress, states couldn't require catalog merchants to collect sales taxes on their behalf unless the merchant had a substantial physical presence in the state. It wasn't enough to just have customers there.

In the Web's early years, lawmakers were reluctant to intervene. Why mess with a good thing?

What's changed now is that as Internet sales growth continues to outpace growth in traditional retailing - up 12 percent in 2011 over the year before, according to David French of the National Retail Federation - states are desperate for revenue in the aftermath of the Great Recession. Still, equity has always been the most powerful reason to address the issue.

"It's not fair that one company has to collect tax and another company doesn't," French says. "It's the same product and the same consumer. The only difference is the channel of distribution."

Amazon, which didn't return calls seeking comment, is adjusting to the inevitable while trying to delay it. The Internet mega-merchant has said it favors federal legislation, and it has made deals with states such as California to eventually begin collecting taxes from its residents. But it is also seeking deals such as the one proposed in New Jersey: It will build two new facilities, bringing about 1,500 new jobs, in return for 22 more months of not having to collect sales taxes from New Jersey residents.

Meanwhile, New Jersey taxpayers are already asked to pay the sales tax - typically called a "use tax" when paid by purchasers - on their tax returns. If you don't have records of your remote purchases, you can use a table to estimate what you owe based on income, ranging from $42 to $85 for taxable incomes between $50,000 and $200,000. Pennsylvania residents now have a similar option.

John Holub, president of the Retail Merchants Association, says that fewer than 1 percent of New Jersey taxpayers comply. According to a study done for the group by Rutgers researchers, the loophole cost the state about $170 million in 2009. By 2015, Holub estimates, the cost will top $300 million.

Holub says he'd gladly welcome Amazon, even with tax incentives of the kind offered to other companies. But he says, "The deal Amazon wants isn't a tax incentive, it's tax avoidance" - an unfair advantage that gives Amazon's merchandise an extra edge in the checkout queue.

"All we're asking for is a level playing field," he says. And after nearly two decades of spectacular Web growth, it's hard not to agree.

Contact columnist Jeff Gelles at 215-854-2776 or