States Pass "Amazon Taxes"

May 9, 2014

Amazon's sales have suffered as states have imposed tax collection requirements upon the online retailer, writes Neil Deininger for the Manhattan Institute's Economics 21.

As states struggle to find new sources of revenue, many have begun collecting what is known as an "Amazon Tax," requiring Amazon to collect a sales tax on purchases by their residents. 

Quill v. North Dakota, a 1992 Supreme Court decision, only requires out-of-state retailers to collect a sales tax on orders shipped to in-state residents if those retailers have a physical presence, or nexus, with the taxing state. The case concerned catalog orders, not internet retail, but the principle applies to online retailers today. As Amazon has expanded, states have begun looking to tax those online sales.

To require Amazon to collect a sales tax from its residents, New York expanded the definition of "nexus" to include Amazon's sales affiliates in the state of New York. Amazon pays companies a commission to link to Amazon's website from their own sites. If those affiliates have a physical presence in New York, New York says that they create "nexus" for Amazon. So far, courts have upheld this definition, and other states have adopted similar laws.

The new tax laws have had an impact on Amazon's business:

  • Without sales tax collections, Amazon's prices were close to 10 percent lower than brick-and-mortar retailers.
  • When forced to collect sales tax, a National Bureau of Economic Research (NBER) working paper by three Ohio State University researchers found that households in states with online sales taxes reduced their weekly spending on Amazon by 10 percent compared to states without the sales tax.
  • According to the NBER study, Amazon sales fell by 24 percent for purchases over $300 after being forced to collect a sales tax.

States lose an estimated $23 billion in sales taxes from web retailers, so states aimed their taxes at Amazon, the largest online retailer.

  • However, the sales tax laws have only increased brick-and-mortar retailer sales by two percent, according to the NBER report.
  • Rather than boost brick-and-mortar sales, the tax collections have pushed shoppers to purchase from other online retailers that are not subject to the tax collection requirements. Along with that two percent increase in brick-and-mortar sales, the NBER study found, was a 20 percent increase in sales by Amazon's online competitors.
  • Amazon has "Amazon Marketplace," a site through which other companies can sell their products after paying Amazon a fee. After Amazon was forced to collect sales taxes, there was a 61 percent increase in purchases of goods over $300 from Amazon Marketplace.

Collecting sales taxes may sound easy, but it is not an easy feat for retailers, as there are thousands of sales tax jurisdictions at the county and local levels. If states are going to force online retailers to collect taxes, they need to make major efforts, writes Deininger, to simply their tax codes. Targeting successful companies to make up budget shortfalls, he says, is not the way to go.

Source:  Neil Deininger, "Is the 'Amazon Tax' Fair?" Economics 21, May 5, 2014. 

 

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