Should state governments be able to force out-of-state retailers to aid in the collection of taxes on goods purchased by state residents? On December 12, the Supreme Court declined to review a circuit court ruling that let stand Colorado’s 2010 “Amazon tax”—so nicknamed because its main goal was to capture revenue from online sales. By implication, other states are now free to pass similar measures.
The 2010 law, House Bill 10-1193, passed when Democrats controlled the legislature, requires out-of-state retailers that don’t collect Colorado sales tax to instead issue use-tax reports to Colorado customers and to state tax collectors.
By law, Coloradans who don’t pay sales tax on an item are required to pay an equivalent use tax, although the use-tax law is widely flouted. The idea behind the reporting requirement was that it would help the state enforce the use tax, which residents would still have to pay themselves. Although the 2010 law has been tied up in state court actions, the federal courts now seem to have cleared the path for its enforcement.
But Amazon tax measures are unjust. Even if the courts continue to allow states to enact them—the Supreme Court may revisit the issue in the future—state governments should decline to do so. States that have Amazon tax statutes should repeal them. And federal schemes to facilitate the Amazon tax should be scrapped.
What’s wrong with the Amazon tax? In brief, state governments should not conscript out-of-state businesses to serve as tax agents, and the compliance costs are onerous and anti-competitive. Consider the relevant issues in more detail.
For a state government to interfere with the operations of out-of-state businesses goes against federalist principles at the heart of American governance. It also imposes burdens on business owners who have no vote in the matter and no representative in that government.
Under the Amazon tax, state governments essentially tell out-of-state businesses, “To sell goods to people in our state, you must collect, or help us collect, a cut of the proceeds—and we’re not even going to pretend to offer you commensurate services in return.”
What of the argument that the Amazon tax “levels the playing field” between local shops that must collect sales taxes and online retailers? This is an issue only because state governments have found it inconvenient to enforce use tax laws. But if the purpose of the use tax is to finance government services to benefit the people paying the tax, then state governments should take up the matter with those paying the tax and (allegedly) benefitting from it—not farm out tax enforcement to out-of-state businesses. Notably, to better enforce the use tax, this year the Colorado Department of Revenue started listing the use tax on income tax forms; I’ve seen no word about whether that has increased compliance.
Another possibility is that state governments could do away with sales and use taxes and either cut spending or increase other taxes (which in Colorado would require a popular vote). After all, Colorado’s sales tax was passed in 1935 as an “emergency” measure, but given that hardly anyone today has any recollection of that emergency, perhaps it’s time to declare the emergency over. At any rate, the fact that state governments harm in-state businesses by imposing a sales tax is hardly a good reason for state governments to also harm out-of-state businesses.
The Amazon tax does not create a level playing field, anyway; rather, it imposes onerous compliance costs on online retailers that local shops don’t face. Store-front businesses have to deal only with their state and local governments. If the Amazon tax spreads, online retailers would have to deal with as many as forty-five state governments (five states have no sales tax). Depending on how Amazon tax legislation plays out, online retailers also could have to deal with a multitude of local, county, and regional governments. Amazon, which already has a physical presence in many states anyway, can handle the additional compliance costs; smaller outfits will have a much harder time.
The irony of the Colorado “Amazon tax” is that Amazon itself has already started charging Colorado sales tax. Apparently Amazon began to do so because in June it opened an in-state warehouse in Aurora; retailers with a physical in-state presence must collect state sales taxes. However, I’ve noticed that Amazon does not collect sales tax for goods sold via Amazon by (at least some) third-party sellers, so those items still are subject to use tax. And of course goods from other out-of-state sellers are subject to use tax.
Advocates of the Amazon tax should stop pretending that it’s about fairness for local businesses. It’s about generating more revenue for state governments and pushing the compliance costs onto distant business owners, and fairness be damned.
Image: Scott Lewis