Sorry to break it to you, but you DO owe sales tax on your online purchases. Well, use tax, actually, but it’s basically the same thing.
Amazon, however, doesn’t have to collect the tax, unlike your friendly 5 and Dime down the street (I’m actually not sure what a 5 and Dime is, but old folk mention it, so it must have once been a thing). You’re supposed to keep track of all those purchases you make, multiply it by the local sales tax rate, and send a check to your local DOR (which only accountants are dull enough to know means the Department of Revenue).
Any of you who don’t do that, please raise your hand.
That, my friendly reader, is tax evasion. How does it feel to be no better than Al Capone?
You don’t have to worry too much, though, you’re in pretty good company. You can consider as cohorts almost everyone else in America. In fact, Colorado last year gave up on “self reporting” of sales tax and removed the line from their tax return because of disuse. I’m sure they would prefer that revenue, but at some point they had to give up on people handing over money to the government out of the goodness of their hearts.
Backstory: North Dakota wanted more money in the early nineties. They realized people ordering from out-of-state catalogs didn’t remit sales tax. Instead of randomly knocking on grandma’s door and digging through her checkbook for evidence of out-of-state purchases, ND demanded mail order catalog companies collect sales tax on all orders to ND. A company called Quill Corp (one of the companies that made the catalogs) said, “look, buddy, we are in no way residents of your state, so your laws don’t apply to us.” They argued it all the way up to the nation’s hippest court, who disco-slapped ND in line (This phrase doesn’t make sense now, but when I wrote this blog post I thought the case happened in the seventies, and the idea of a disco slap is hilarious), declaring that companies without what’s called “nexus” don’t have to collect and remit sales tax.
Note that no part of the debate asked if the residents of North Dakota owed the sales tax. Of course they did, Quill just didn’t have to collect it.
The amount of sales tax lost from these out-of-state sales had always been fairly insignificant in most locations, so for years after the Quill ruling, few efforts were made to obtain the money. Amazon changed that. Online sales have slowly but surely caught on, way more than catalog sales ever could. Right now, it’s estimated that the states altogether are losing about $10 billion dollars a year on non-remitted taxes from these sales. After all the federal debt ceiling debate, $10 billion looks like a drop in the Pacific Ocean compared to what the government tosses out every day, but those few drops are like an oasis for parched states.
Since Amazon doesn’t have nexus (essentially a “sufficient presence” like real estate or employees) in almost any state, they don’t have to collect sales tax except for about 3 exceptions. If they don’t collect it, it’s up to you to pay your own portion, which, as we established, isn’t happening—you tax evading cretin.
Several states have gotten creative recently in their methods of trying to force companies to collect the tax. If you pay attention to the news, you’ll hear this issue come up every year or so, when another state tries to limbo under the Quill case and force out-of-state companies to pay. To my knowledge, none of the innovative new laws have managed to collect a penny of additional taxes.
This has gotten to be such an issue now that the federal government is trying to get involved (I know it’s surprising, but the Feds do occasionally interfere with states’ affairs). Majority Whip Senator Durbin just in the last couple weeks proposed the “Main Street Fairness Act” that would require online companies to collect sales tax. I’m not sure why he doesn’t call it the “Let’s Just Throw These States a Bone Act,” but, as you can probably tell from my blog titles, I’m not exactly the best namer (fortunately for my children my wife took the lead on their names).
Despite being slightly upset that they didn’t choose my suggested bill title, I can’t get too upset about what they’re trying to do. The states would be happy with the law because they’d get more money. But taxes are not a money raising wand: the cash has to come from somewhere.
Let’s look at the other side of the bill with its effect on Walmart and Amazon. Currently, even if Walmart can match Amazon’s prices, it’ll still cost more for consumers because Walmart has nexus everywhere (I think they just opened a store in Hades itself…sorry, I’ve been reading Percy Jackson with my family) so they have to collect sales tax. Amazon, of course, doesn’t. Not fair, right?
Or, since people get more riled up about small companies for some reason, imagine if your friend decides to sell custom soap at the mall. Some guy (note: I’m using the gender neutral version of the word) in Nebraska sells basically the same thing online. Your friend will have to collect and remit sales tax, which, above raising the price of the soap for the end consumer, will cost your friend (yay, accounting fees) to set up a system to keep track of that. The guy in Nebraska will only have to keep track of sales tax in Nebraska, which, since we all know no one buys soap there, will end up being much cheaper to track. So less money to track, and the soap will cost less.
Well that’s not fair.
Senator “Let’s put the word ‘fair’ in all my bills” suggests making online retailers collect the same sales tax as the locals. Much more fair, right?
Well…no, it’s not. Think of it you’re the guy in Nebraska: in addition to keeping track of all the normal business stuff, you have to keep track of where all of your orders ship and what tax rate to apply to that order. Since in some cases different cities in the same zip code will have different tax rates, and they all have weird exceptions and rules, person in Nebraska is going to pay a ton to get it all figured out. And it’ll probably end up being wrong on all his orders to Chicken, AK, so then the guy will have to deal with auditing costs as the Chickenites check out his books, which always leads to tons of other cities jumping in for their own audits. The person selling soap in the mall is now sitting in the corner laughing, since all the local customers pay the same sales tax rate.
Congress, if they think about this issue (which is a big ‘if’), plus the plethora of other issues that I probably haven’t considered, could throw in some exceptions, such as only businesses under ‘x’ amount of sales get to avoid collecting sales tax. And it’ll probably be written in a way that the Amazon lawyers will get around it within a year.
I don’t pretend to have the answers on how to solve this dilemma. Life’s not fair, and in the end I imagine someone will end up getting screwed. I just wanted to make people aware that this sales tax issue is way more complex than just making Amazon stick an additional percentage to your diaper purchase.
Also, those of you who believe in big government but not paying your sales tax are hypocrites, and those of you who believe in limited government may be sticking to your values, but are still breaking the law. Just FYI.
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NOTE: Yep, I’m a CPA in Colorado. Nope, this isn’t tax or accounting advice, just my opinion, so don’t treat it as anything but that. Find a local accountant and pay them all kinds of money for your advice.