States hard on trail of online sales taxes

If you hit the Internet to shop, the taxman will be right behind you

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If you buy Christmas gifts online this year, you may be saving money on your end, but you might also be costing the state treasury its fair share of sales tax revenue.

State revenue departments across the country have complained for years that big online retailers aren't remitting their share of sales taxes. At stake are the hundreds of millions of dollars that Pennsylvania and other states are losing when a shopper buys a CD, book or television online, instead of in a bricks-and-mortar store.

In Pennsylvania, the Department of Revenue estimates that the state is missing out on nearly $300 million in sales tax every year.

"Pennsylvania is not the only state in this boat," said Stephanie Weyant, spokeswoman for the revenue department.

Every year since Internet shopping began being measured, the amount spent online has increased annually. On Cyber Monday alone -- the Monday after Thanksgiving -- about $900 million was spent online this year, either at stores that operate exclusively in the cybersphere, such as, or at the online divisions of actual stores, such as Best Buy.

Online retailers that do not maintain a physical presence in Pennsylvania are not required to remit a sales tax (though some do so voluntarily), thanks to a 1992 court decision that predates the era of Internet shopping. In Quill Corp. v. North Dakota, the Supreme Court ruled that a retailer or purveyor of goods couldn't be forced to remit sales taxes to another state unless it had some kind of "nexus" there, a physical presence such as a store or warehouse.

For years, Congress has been debating federal legislation requiring all retailers to figure out how to remit the sales tax to the appropriate state, but so far, the law has gained little traction and has been opposed by, considered to be the biggest cyber-fish out there.

While Congress has been inactive on the issue, New York has been proactive, passing a law that requires and other Internet retailers to collect sales taxes on transactions with New York customers. Amazon challenged the law, lost in January, and now a New York appeals court is expected to issue its own ruling soon, according to a report in The New York Times. If the law stands, other state legislatures would be tempted to follow the same legislative path, especially given the depleted condition of many state treasuries.

"Given the severe fiscal problems that states are having right now, I do expect more states to look at this," said Michael Mazerov, senior fellow at the Center on Budget and Policy Priorities in D.C. (North Carolina and Rhode Island have tested similar laws.) If the New York law survives the state's court system, it's doubtful that the U.S. Supreme Court would agree to hear the case, Mr. Mazerov said, because "they want Congress to address this issue. ... The 1992 decision is their last word on the matter."

Why doesn't Amazon -- or, or -- collect the sales tax for every state? One reason is that not collecting the sales tax, especially on big-ticket items, gives online vendors an instant pricing advantage over bricks-and-mortar stores, and it's not an advantage they're going to forfeit easily.

Amazon says collecting and remitting sales taxes to every state, at varying rates, would be too complicated for a vendor of its size. But an analysis from the Center on Budget and Policy Priorities notes that other retailers are able to do it, and that even Amazon does it for the other retailers -- such as Macy's and Target -- that it partners with to sell merchandise through Amazon's site.

"They should be paying the tax," said Sharon Ward of the Pennsylvania Budget and Policy Center. "But they essentially created a loophole in which they claim they have no presence in the state, and therefore they don't need to collect the tax." This, even though Amazon has distribution warehouses in the state -- but they are technically owned by a subsidiary, DEDC LLC.

If retailers escape collection of the sales tax, that doesn't mean shoppers are supposed to escape paying it. Technically, if you go online to buy a TV from Amazon -- or a rocking chair from some craftsman in Idaho -- and the vendor doesn't charge a sales tax, you're supposed to pay it yourself by remitting a "use tax" to the state. (Last budget year, Pennsylvania collected $409 million in use taxes). Most states that enforce a sales tax also charge a use tax -- back in the day, this was meant to prevent people who bought from out-of-state mail-order catalogues from skipping out on their sales tax debts. Today, it applies to Internet sales, as well.

Problem is, most people don't remit the use tax, either, because it's a pain or because they don't realize that they are supposed to do so. That's why the states want it to be collected by the retailer, not remitted by individual customers.

"What the states are in need of is a national solution dealing with Internet-based sale," Ms. Weyant said.

Cities and counties, which sometimes collect their own sales tax (Allegheny County and Philadelphia do this), need a national solution as well. They, too, miss out when their residents buy certain items online instead of the local store.

A software program calculating and remitting the proper sales taxes to the 50 states is one thing; a program that keeps track of the various city and county rates is another. But over the last several years, those software programs have become more prevalent and less expensive. And there are also software vendors who will handle all of your Internet transactions in real time, calculating the proper sales tax disbursement without the business owner ever having to lift a calculator, said Mr. Mazerov.

But Congress has be slow to force a fix, partly because members believe such a move would be painted as a "new" tax on consumers. They also don't want to be accused of punishing small businesses, although most legislation pertaining to Internet sales tax collection includes a so-called de minimis provision, which would exempt small retailers with less than $5 million in annual revenue.

Bill Toland can be reached at or 412-263-2625.


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