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During this time of year, you often hear the phrase “just in time for the holidays.” Since Friday, November 1, 2013, Massachusetts residents making purchases have noticed something new in the process of checking out on Amazon—state sales taxes of 6.25 percent—just in time for the holidays. This date was planned and reached in connection with an agreement between the state and Amazon. The deal did not come easy. Amazon and the state negotiated for six months before reaching an agreement, and Amazon received many concessions. One such concession included not requiring Amazon to collect sales taxes prior to November 1, 2013, even if Amazon established a physical presence in Massachusetts prior to November 1 (which it did) in exchange for Amazon agreeing to collect sales taxes, adding new Massachusetts jobs and a physical presence.

So far, customers do not seem thrilled about the prospect of Amazon’s collecting of sales tax, but these customers are already required to pay use tax (an equivalent tax) on such sales because sales tax is not being collected by the vendor. Such use tax is typically due when the customer files his or her state income tax return. Contrary to law, many customers view taxes on online sales as a new tax since so few actually pay such use taxes. This has been the problem that state lawmakers have been attempting to counter as the economy has not recovered from its peak several years ago, leaving state coffers in need of funds. Businesses are better at collecting and paying sales taxes than your average individual taxpayer is at paying use taxes.

The general requirement that enables a state to constitutionally require a retailer to collect sales taxes hinges on one thing: physical presence in the underlying state. This physical presence bright-line rule remains in the absence of Congress passing anything to the contrary. Common carriers, such as the United States Postal Service, Federal Express and UPS do not establish a physical presence for out-of-state retailers.

Amazon has emerged as both a friend and foe in recent years of the states’ ability to require it to collect and remit sales tax on its online sales. For many years, Amazon has carefully placed its physical business presence so that it would not be required to collect and remit sales taxes in connection with its sales to some of the nation’s most populated states (and where critical masses of Amazon customers reside). Had these same sales taken place in the state in a traditional brick-and-mortar retail operation, the customer would have paid the seller sales tax and the seller would later remit those taxes to the state.

More recently, Amazon has become a champion of the Marketplace Fairness Act of 2013, which would enable states to require qualifying remote sellers (such as Amazon) to collect and remit sales taxes. Many argue that such a measure would level the retail playing field between brick-and-mortar businesses and Internet businesses. All things being equal among retailers, Amazon believes it can retain and continue to grow its market position. Amazon is currently subject to collecting and remitting sales taxes in an increasing number of states, as its business has grown and it continues to expand its footprint in attempt to improve product delivery times.

Interestingly enough, while Amazon has supported the Marketplace Fairness Act, it has remained a staunch opponent of states attempting to require it to collect and remit sales taxes. Amazon has gotten around collecting sales tax on most of its sales by virtue of the constitution limitation on the ability of states to require remote sellers, like Amazon, to collect and remit sales taxes.

Other perspectives on online sales taxes

The Boston Herald recently published a related opinion piece with an interesting perspective entitled Paying tax to Amazon nonsensical by Michael Graham. Some of the major points and arguments of why it is “nonsensical” to tax Amazon sales not only relate to the fact of the tax, but also to the manner in which online sales are taxed. For example, when a Massachusetts resident buys gas in New York or goes on vacation and purchases items, the resident pays the local tax, not Massachusetts tax, even though the items may return to Massachusetts ultimately.

Graham posits that if businesses are to apply sales taxes, they should be applied in the same way on the Internet as in any traditional transaction—“pay the rate of the city/state where the store itself is located.” Three reasons that Graham offers in support of his argument are:

  1. Taxes will be easier for businesses to collect and only one tax rate will apply to the business’ sales (its local rate), which the business will pay to its state each month
  2. It does what sales taxes are intended to do (e.g., pay for the police outside the Amazon warehouse in X state, not the state where the items were shipped)
  3. It will lower customers’ tax bills (i.e., businesses will either relocate to states with lower sales tax rates or states will be forced to be competitive in their tax rates with other states to attract Internet businesses)

While this is an interesting perspective, it is highly unlikely that something like this would ever be passed, as lawmakers have little incentive for such a move unless there is a dire public outcry for it (the author recognized his idea would have little traction). Nonetheless, this article is highly relevant, as many states have recently increased sales taxes in order to lower income taxes. If this is a continuing trend, it is likely that sales taxes in general will receive heightened public scrutiny.