Busted! No More Avoiding Sales Tax by Shopping Online?

In May, Amazon [AMZN] decided to sue the State of New York, which passed a law requiring the site to collect sales tax on items bought online by New Yorkers — even if Amazon has no physical presence inside the state. According to the AP, other fiscally-troubled states are now ganging up to pass the same kind of laws. Is one of the biggest benefits of online shopping about to end?

States miss out on about $3 billion of tax revenue annually because of online shopping, which accounts for about 8% of all the sales made in the US in a given year — and that number is rising. An online sales tax would mean everything from iTunes songs to online storage would be taxable according to various state and local tax codes.

The issue isn't whether consumers should have to pay the state for items purchased from out-of-state retailers; they are already supposed to self-report those purchases and pay a "use tax," but few people do. The states' new efforts aim to make online retailers collect those taxes on behalf of the state, the way brick-and-mortar stores do.

As of today, there is a ban on states collecting tax revenue from business transactions that occur between a citizen and an out-of-state retailer, going back to a Supreme Court case in 1992. But with every government entity reeling from the 2008 economic meltdown, Congress could easily overturn that ban and make online taxation a reality.

Twenty-two states and 1100 brick-and-mortar retailers have responded to the fight by backing an organization called the Streamlined Sales Tax Governing Board, which will lobby for simplified tax codes for retailers. Online taxation has been put on the table by the retailers of the group as a bargaining chip for simpler laws. New York has not joined the SSTGB, because doing so would mean extensive revision of its own tax code.

Critics say that enforcing tax laws online forces online retailers to comply with a byzantine network of codes that vary from area to area, and Amazon has said that New York's lawsuit violates their equal protection under the Constitution by targeting their business model specifically. The State of New York has argued that because sites like Amazon have affiliates in New York that direct traffic to their site, New Yorkers should be paying sales tax there. Amazon has complied with the law despite their lawsuit, but other retailers like Overstock.com have simply elected to drop their New York affiliates instead of conforming to the regulation.

The AP reports the SSTGB is hoping that a cash-strapped Congress will address the idea of online sales tax in 2009 and draft legislation requiring it. But that may mean a renewed burden on online retailers: how can they keep customers if they must charge extra for sales tax and shipping? At what point is the convenience of online shopping outweighed by potential savings at local retailers?

When online retailers rose to ascendancy, many analysts predicted the crippling of brick-and-mortar establishments. Since then, the trend has seemed inevitable. But in 2009, local stores might finally gain a level playing field against their long-tail rivals, and that could spur a resurgance of local sales. Should the price of oil rise again and make home delivery more costly, e-tailers like Amazon might have to take aggressive action to sales of commonly-available items up — a taste of their own medicine.

[Image via liewcf]

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