The thorny issue of internet sales tax

When a Michigan retailer wrote me an e-mail asking if we’d ever covered the issue of internet sales tax, I said no, and it left me uneasy: navigating tax rules is a nightmare for all of us. Some states have new laws about this and some do not, and it’s a hotly contested issue that’s been percolating for as long as there’s been e-commerce.

That retailer may have been reacting to news this week that Michigan lawmakers are trying to start forcing e-commerce retailers to collect state sales taxes. By one estimate, collecting taxes from web sales could save that state $141.5 million, and, some believe, increase business at Michigan retailers.

Amazon.com reportedly spent $5.25 million as of August, fighting a current California law that says e-commerce sales must be taxed. With this law, independent retailers in California may find themselves in the odd position of siding with Wal-Mart (which favors the e-commerce tax) against Amazon. And of course your average consumer, wary of losing the tax-free internet advantage, is falling on the side of Amazon. The California tax law is up for a public referendum in June 2012.

Many states want internet commerce taxed. In New York, Gov. Eliot Spitzer managed to pass such a law back in 2007 as a way of raising tax revenue without technically raising taxes. And then the state was sued by Amazon the next year.

According to Howard Gleckman of the Urban-Brookings Tax Policy Center, the states of Colorado, Connecticut, Minnesota, and Missouri all passed internet tax laws earlier this year, and Texas “presented Amazon with a bill for $269 million in uncollected sales taxes.”

As Gleckman points out, those internet purchases are not technically tax-free. The catch is that online retailers haven’t been required to collect those state sales taxes on behalf of state governments the way a brick-and-mortar retailer is:

“If you live in a state with a sales tax, you’ve got to pay, no matter where you buy. If the seller doesn’t collect the money, you owe what’s known as a use tax. It is right there on your income tax form.

But, of course, almost nobody pays. And that’s where those online retailers have an unfair competitive advantage over local brick-and-mortar stores. Buyers get what looks like a 5 or 6 percent “discount” because of those uncollected sales taxes. Worse, their local competitors may end up paying higher taxes to make up for the lost revenues.”

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