The Amazon Tax Debate: Where Do You Stand?

As a small business owner, even if you work from home, you should know about the debate that is raging right now regarding whether or not a growing number of states have the right to demand that online retailers, such as, collect sales tax on products sold to customers in those states.  Perhaps surprisingly to some, online retailers currently are NOT required to do so in more states than not.  Although Amazon is just one of many online retailers potentially affected by these proposed changes, it is most certainly the largest.  It is this fact that has led the pundits to refer collectively to the current and growing number of similar state-based proposals as The Amazon Tax.

It’s no surprise that Amazon and companies like it aren’t in favor of gathering sales tax on products they sell in states where they have not ever had to before.  After all, it’s no secret that online retailers’ current tax-free status gives them the competitive edge over what is referred to as “brick and mortar” business owners―many of whom must charge as much as 10% or more than their online competitors due to taxes for the same products.

You may be asking yourself, “How come online retailers aren’t paying sales tax on the products they sell?”  The answer can be traced back to a 1992 U.S. Supreme Court decision that “allows Internet and catalog sellers to avoid charging the tax to a customer if they do not have a ‘physical presence’ in the customer’s state.” * And even though the law states that customers are responsible for paying the sales tax to their own states on such purchases, that rarely if ever happens.  As a result, it’s estimated that states and localities are losing as much as $7 billion per year in revenue.*  Given today’s serious economic challenges, especially at the state level, those are funds that could be going toward education, health care and any other number of critical services.  Of course, that’s the crux of the states’ argument anyway.

The key to Amazon’s rebuttal lies in its assertion that collecting sales tax on products it sells in states where it has no presence and therefore enjoys few benefits would be an administrative burden that would greatly affect company profitability.  However, a number of pundits have gone to great lengths to poke holes in Amazon’s rationale.  Ironically, they don’t have to go very far, as perhaps the strongest argument against Amazon and other retailers’ wanting to maintain the status quo resides in the largest online retailer’s own current practices.

The fact is that Amazon already collects taxes on many of the products that it sells on its website in conjunction with its nationwide affiliate partners.  Truthfully, those in favor of the new tax policy assert, it would not be too much for Amazon to take what it is already doing in navigating the state-specific, sales tax complexities as they relate to their affiliate partners and apply them to their own products.  Additionally, Amazon’s higher ups have, from the very beginning, made no secret of the fact that the company’s competitive edge lies in its ability to sell products free of the sales tax burden in many states.

So, is there a potential lesson here?  One may be this:  Think carefully before you state your case as to why others would do well to do business with you.  In time, it seems your own pitch can actually come back to haunt you.

*Note:  For a complete review of all the intricacies associated with this debate, please click here on the Center on Budget and Policy Priorities, where you’ll find the outstanding summary and background report by Michael Mazerov dated November 29, 2010 that served as the source for much of this article. And you can check out cheap startup businesses here.