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National study finds where Amazon collects sales taxes, it loses sales

The ongoing political debate over so-called “Amazon Taxes” (i.e., remote seller taxes) wages on. Are such taxes constitutional? What legislation, if any, such as the Marketplace Fairness Act of 2013, is appropriate or adequate to address the country’s sales tax issues? What is clear is that no solution has been proposed in Congress that has sufficient backing to put traditional brick-and-mortar retailers on even ground with online retailers as it relates to sales tax. In fact, it appears there is no consensus whether such legislation is desired by the general public.

Presently, the constitutional line drawn by the United States Supreme Court as to whether an online retailer can be required to collect and remit sales taxes on their sales to individuals located in a particular state hinges on a bright line test. The bright line test articulated by the Supreme Court focuses on whether the online retailer has a physical presence in a particular state. Under this test, a state cannot impose sales tax obligations on an online retailer for its sales to purchasers if such retailer does not have a physical presence in that state.

At the forefront of this debate has been Amazon. Amazon has adopted, at times concurrently, contrary positions on the issue of whether sales tax should be imposed on its sales. Amazon has flip-flopped on this issue depending on the forum and the possible benefits to agreeing to collect and remit sales taxes in a particular state. Surprisingly to some, Amazon has emerged as one of the most vocal proponents of leveling the sales tax playing field between brick-and-mortar and online retailers through federal legislation. However, Amazon stands to gain from such legislation. Amazon believes it can compete on a level playing field and stave off would-be competitors. Amazon grew market share over the years by largely avoiding obligations to collect and remit sales tax. Now that Amazon is the largest player in this area, it believes it will continue to grow market share and be profitable even if it is required to collect and remit sales tax. Additionally, Amazon’s growth has meant expanding its physical presence in various states, and thus, its obligation to collect and remit sales taxes has expanded under current law.

A recently released study from researchers at The Ohio State University’s Fisher College of Business makes many stark conclusions not only for Amazon, but for the impact of sales taxes in general. The study focused on five states that have introduced an online sales tax—California, New Jersey, Pennsylvania, Texas, and Virginia. From this data, the researchers were able to draw conclusions regarding the effects of the Amazon Tax on consumer demand for Amazon products, as well as the demand for both local and other online competitors.

Here are a few of the more significant findings and facts highlighted in the study:

  • In 2011, on average, the collection of general sales tax across all states constituted 10.4 percent of state tax revenues. Sales tax rates ranged from zero percent of total state revenue to 21 percent, as was the case in Washington.
  • Online retailers that are not required to collect sales tax enjoy a price advantage. The study showed that the introduction of the Amazon Tax resulted in a notable decline in the total dollar amount of products (net of sales tax) purchased on Amazon. The decline was 9.5 percent across all study states.
  • Gross consumer spending (inclusive of taxes) decreased 2.8 percent on Amazon purchases after the implementation of the Amazon Tax.
  • Strong evidence exists that the effect of the Amazon Tax increases with the size of the purchase. In other words, the higher the price of the item, the higher likelihood that consumers will seek an alternative online retailer over Amazon in order to avoid sales tax. Once the Amazon Tax was applicable, consumers decreased their spending on Amazon by 15.5 percent on purchases larger than $150 and by 23.8 percent on purchases equal to or larger than $300.
  • To a small degree, imposing the Amazon Tax on Amazon returned sales to local brick-and-mortar businesses. However, much of Amazon’s loss of consumer sales went to competing online retailers. The study found a 19.8 percent increase in sales at competing online retailers and a two percent increase in local brick-and-mortar expenditures due to the imposition of the Amazon Tax on Amazon purchases. The shift to other retailers is even starker for purchases over $300.
  • Overall, the study shows that Amazon experienced a decline in sales following the implementation of an Amazon Tax. Households substitute Amazon with other retailers.
  • 0.2 percent of households in Rhode Island report use tax on their tax returns, and only 0.3 percent of households in each California and New Jersey report use tax. States with higher participation included Vermont and Maine, with 7.9 percent and 9.8 percent of households reporting use tax, respectively. Use taxes are paid by the consumer where no sales tax is paid when they purchase an item, most often this occurs in connection with online purchases. Note that these figures do not represent actual compliance with law as some households may not have made any purchases that are subject to state use tax. However, with use tax reporting rates this low, it can be argued that consumers ignore paying use tax. Furthermore, in 2012, only 22 states had “use tax” filing requirements built into their state income tax forms.

These results are contrary to what some politicians would like you to believe—that sales tax does not have a meaningful influence on customer behavior. What is certain is that sales tax laws need to evolve in order to continue to be a meaningful part of each state’s revenue. Otherwise, sales tax revenue will need to be replaced with other forms of taxation to replace lost revenue.

The entire study conducted by Brian Baugh, Itzhak Ben-David, and Hoonsuk Park, titled The “Amazon Tax”: Empirical Evidence from Amazon and Main Street Retailers, can be found on the Social Science Research Network (SSRN).

New York: Airbnb, a business model for employing underutilized space, is under investigation

The New York Attorney General and Airbnb, Inc. are in a dispute involving the investigation of whether the company has run afoul of lodging laws and tax laws applicable to lodging. The New York Attorney General filed an investigative subpoena to review the company’s records. Airbnb responded by seeking to quash the subpoena, claiming it violated its users’ privacy and was really a government “fishing expedition.”

For those not familiar with Airbnb, it is essentially a peer-to-peer website that provides rental accommodations. Users of the website create an online profile for their property, along with the dates the property is available to rent. The website connects willing property owners with willing guests for a fee. This website is used as a substitute for the temporary lodging arrangements traditionally provided by hotels and motels. For example, if you own a condo or rent an apartment and travel one week of every month, you could list that week on Airbnb so your residence does not sit unused. On top of it, the owner could generate some extra cash by renting the property on a short-term basis.

Under New York law, owners or renters of apartments in multi-unit buildings may only rent out part of the apartment for a period of less than 30 days and must remain present. Thus, the law permits boarding or renting rooms. Furthermore, in New York City, an argument could be made that the New York Hotel Room Occupancy Tax should be collected and paid to the city, although it appears no one is collecting the tax at this time.

According to CBS New York, Airbnb stated on its website that “[t]he current short-term rental law was designed to target illegal hotel operators.” Airbnb further stated that “[t]he authors of the legislation admitted that Airbnb, and the individuals who use Airbnb, were not the target of this law. The Attorney General’s attack on thousands of New Yorkers demonstrates why the law should be modified—not repealed—to ensure regular New Yorkers can share the home in which they live.”

The emergence of businesses such as Airbnb, Lyft, Uber, and a number of other similar websites are sometimes initially viewed as violating existing laws. While this may be true in some instances, it is also true that laws may need to catch up to the times, as antiquated laws could not have anticipated a world where customers are hailing cabs or renting private residences from the press of a few buttons on their phone. These businesses are certainly not “traditional.”

Is your business an innovative “disruptor” or are you considering adding a line of business that might be construed as “disruptive” to the status quo? If so, please contact us to discuss your business—we would be more than happy to work with you to put together a legal risk matrix or address any of your questions or concerns.

Washington: State approves legislation authorizing transfer on death deeds

The State of Washington has approved legislation (H.B. 1117) that authorizes transfer on death deeds, which allow an individual owner of real property to automatically transfer the real property to one or more designated beneficiaries upon such owner’s death. Almost half of the states in the United States, including Ohio and Illinois, have enacted similar statutes authorizing transfer on death deeds.

A transfer on death deed is treated as a non-probate asset for Washington estate tax purposes, and the beneficiary takes the property subject to the transferor’s liabilities, claims, estate taxes, and administrative expense. The beneficiary also takes the property subject to all encumbrances, liens, mortgages, and other interests to which the property is subject at the transferor’s death, including liens recorded within 24 months after the transferor’s death.

The transfer of property pursuant to a transfer on death deed will be exempt from Washington real estate transfer taxes provided that a certified copy of the death certificate of the transferor is recorded to perfect title.

In order to be valid, a transfer on death deed must:

  • Contain the essential elements and formalities of a properly recordable deed;
  • State that the transfer to the designated beneficiary (or beneficiaries) is to occur at the transferor’s death; and
  • Be filed in the county records where the property is located before the owner’s death.

A transfer on death deed is revocable even if the deed or another instrument contains a contrary provision. The capacity required to make or revoke a transfer on death deed is the same as the capacity required to make a will.

The interest of a designated beneficiary lapses if such beneficiary fails to survive the death of the owner. If the owner has identified two or more designated beneficiaries to receive concurrent interest in the property and the interest of one beneficiary lapses for any reason, then the share of such lapsed beneficiary transfers to the other designated beneficiaries.

A transfer on death deed creates no present interest in the beneficiary to the property and the beneficiary’s creditors cannot make a claim against the property. During the life of the owner, a transfer on death deed does not affect the owner’s right to transfer or encumber the property.

This legislation takes effect June 12, 2014 and applies to a transfer on death deed made before, on or after June 12, 2014 by a transferor dying on, or after June 12, 2014.

For additional information regarding these subjects or any other multistate tax issues, please contact:

David M. Kall

Susan Millradt McGlone

Jeremy J. Schirra

Businesses must be vigilant and careful in managing their state and local tax liabilities and exposures. We understand this can be a daunting task. McDonald Hopkins Multistate Tax Services provides a broad range of state and local tax services including tax controversy, tax evaluation, tax planning, and tax policy. With professionals who have worked both inside and outside government agencies, our multistate tax team leverages its knowledge and experience to help clients control their complex multistate taxes.