Amazon Will Eventually Pay Online Sales Tax, Says Analyst

    July 22, 2011

It has been an interesting few weeks for retailers, both online and offline, in the state of California due to the new law requiring online retailers to pay taxes on their affiliate advertising. In response, ecommerce sites such as Amazon and Overstock have shut down their affiliate programs in the state and are trying to get California residents to overturn the law.

Do you think the law will hold up, or will it be overturned? Please share your thoughts.

As with any situation, there are two sides to this story. Online retailers, like Amazon, believe they are protected under a Supreme Court ruling in 1992 that said retailers shouldn’t have to pay sales taxes in states in which they don’t have a physical presence. Since Amazon doesn’t have a physical store in California, it therefore believes that the law is out of order.

California, on the other hand, argues that since these retailers have affiliates in the state that sell products for the online retailers, they should be required to pay a sales tax. Although California obviously has a financial motivation in its action, it is also aware that many brick and mortar businesses feel that online retailers have an unfair advantage over them. Brick and mortars are also feeling victimized by the growing trend in which consumers visit brick and mortar stores to test products but then turn around to make their purchases online.

In its effort to get the legislation overturned, Amazon is pushing the idea that because no one wants to pay sales taxes, they should oppose any initiative in favor of taxing online retailers. What’s interesting though is that consumers don’t actually avoid sales taxes by purchasing items online. They are, technically, supposed to keep their receipts and pay what’s called a “use tax.” Most people, however, have not heard about this tax, or simply choose not to pay it because it cannot be enforced.

Amazon is also advocating the idea that this law is placing a tax on the Web, a suggestion that Attorney Mark Rasch, the Director of Cybersecurity and Privacy Consulting at CSC, believes is completely false.

“The truth is it’s not a tax on the Internet. The question is, ultimately, ‘Even though you owe the tax, who’s going to collect and pay it? Is it going to be Amazon, or is it going to be you?'” he said.

According to him, the whole issue comes down to the Dormant Commerce Clause. As he explained, Congress has not acted in the area of taxing ecommerce, which has resulted in confusion for the states that have tried to legislate.

“When Internet ecommerce first started in 1990, 1991, Congress deliberately made a decision they weren’t going to step in, but now we’ve had 20 years of experience,” said Rasch.

He believes that online retailers are currently just buying themselves time and that Congress will step in soon and take action.

“It’s time for Congress to get in and say, ‘Can we tax this, or can’t we tax this?'” he said.

Rasch went on to say that things would probably “get worse before they get better” but that federal regulation would help to resolve the ongoing debate.

Do you agree with Rasch that federal legislation is the answer to the taxation dilemma with ecommerce? Why or why not?