Glory days of tax-free e-commerce at an end?

Faith Merino · April 12, 2011 · Short URL:

A new bill from Dick Durban of Illinois could force Internet retailers to collect state sales taxes

As Amazon’s game of musical states axes more states demanding the Internet retailer pay state taxes like brick-and-mortar stores do, Senator Dick Durbin (D) from Illinois is gearing up to introduce legislation that would force online retailers like Amazon and eBay to collect state sales taxes from customers.

The bill, called the Mainstreet Fairness Act, will finally put Internet retailers on a level playing field with brick-and-mortar stores. Of course, while the bill quaintly emphasizes the fairness advantage that this will offer main street mom-and-pop stores, there will be some other happy retailers as well—big box stores, like Walmart, Best Buy, and Borders. The bill is scheduled to be presented some time after Tax Day (April 18, for those of you who haven’t done your taxes yet).

The move to crack down on Amazon and other online retailers comes shortly after Illinois governor Pat Quinn signed a bill that would force all Internet businesses with affiliates in Illinois to collect sales taxes from customers. Amazon immediately packed its bags and waved goodbye to Illinois, as it did to Texas, Rhode Island, North Carolina, and Hawaii.

“Illinois’ main street businesses are critical to ensuring our long-term economic stability, which is why they must be able to compete with every company doing business online in Illinois,” said Governor Quinn in a statement released March 10. “This law will put Illinois-based businesses on a level playing field, protect and create jobs and help us continue to grow in the global marketplace.”

It certainly makes sense for states to want to collect whatever shreds of sales taxes they can get their hands on as the country attempts to rebuild its economy after the 2008/2009 pitfall, but do they have grounds to force online retailers to pony up sales taxes? Amazon’s headquarters are in Washington, so why should it pay state sales taxes to Illinois? A similar point was made in the 1992 Quill Corp v. North Dakota case, in which the state argued that because so many residents of North Dakota were ordering Quill’s office supplies from the company’s mail-order catalogs, the state had a right to charge sales tax. North Dakota lost, since Quill Corp’s headquarters were in Delaware, which meant the company had no legal obligation to collect sales taxes for North Dakota.

That’s why the legal wrangling that Amazon is facing down is focused entirely on affiliates. Because Amazon is based out of Washington, it can’t be expected to collect sales taxes for all other 49 states (not to mention other countries). But its in-state affiliates can.

Until now, Amazon’s strategy has simply been to cut ties with its affiliates in those states that are demanding sales taxes—in effect saying that if the states want to change the rules, then Amazon won’t play anymore. But Senator Durbin’s bill would hold Amazon accountable for sales taxes in all 50 states, so it won’t be able to simply leave a state that implements rules it doesn’t like. So now Amazon will be left with two options: either move out of the country (Europe isn’t a good idea. They LOVE taxes over there. Amazon would probably have to go somewhere like Mexico or Nicaragua where it would function just like a cartel) or start raising its prices. 

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