NCPA - National Center for Policy Analysis

DAYS MAY BE NUMBERED FOR TAX-FREE NET SALES

April 18, 2007

A powerful alliance of politicians, including key U.S. senators and the National Governors Association, is arguing that out-of-state retailers -- most notably large internet companies like Amazon.com -- must be required to charge sales taxes on purchases, says CNet.com.

Of course, online purchases from sites like Amazon and eBay only seem to arrive tax-free.  Legally speaking, although they are not required to collect sales taxes on shipments, purchasers are required to pay their own state's sales tax rate -- the concept is called a "use tax" -- and then voluntarily report the amount owed at tax time. For example:

  • California residents are burdened with a sales and use tax of at least 7.25 percent.
  • State law is strict; if Californians travel to a state with a 5 percent tax and shop there, the law requires them to cough up the 2.25 percent difference when they return.
  • But compliance is spotty at best; California's Board of Equalization estimates the state lost $1.34 billion in 2003 because residents aren't paying use taxes -- and attributes $208 million of that to online purchases.

The governors have found allies among large retailers like Staples and Wal-Mart Stores that have physical presence virtually everywhere -- and therefore already must collect sales taxes on online shipments.  They tend to support the tax because it reduces their competitive disadvantage and simplifies their tax accounting.

What remains unclear is whether the big-business-and-state-politician coalition will be able to muster enough support in a Democratic Congress to enact a law making sales tax compliance mandatory.  In addition, they face Republicans who largely take the side of online-only retailers and Silicon Valley companies, which argue that even a simplified sales tax system will impose additional compliance costs that will be passed on to consumers.

Source: Declan McCullagh, "Days numbered for tax-free Net sales," CNet.com, April 17, 2007.

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