Many online retailers received a shock last month when they received official notice from the State of New York that they must register and begin collecting sales tax.
Until this month, companies that didn’t have a store or “physical presence” in New York were not required to collect the sales tax. This idea of taxation linked to physical presence has been around for a bit - and actually first made news with catalog sales. But the New York law presumes to redefine what constitutes a “vendor” on the web - and makes affiliates, marketers and shops that direct traffic to online retailers potentially responsible for creating a “physical presence” for purposes of tax.
As states like New York face pressure to find new revenue in a slow economy, taxing internet sales is an attractive option for legislators. To those legislators, increased revenue beats the option -cutting spending for programs. This is important because unlike the federal government, states may not operate at a deficit.
The argument for taxing internet sales focuses on the idea that many of the same products that could be bought in a store and be taxed escape taxation when purchased over the internet. If I buy a pair of shoes at my local shoe store, I do pay sales tax. If I buy a pair of shoes from Zappos, I don’t. Is that fair to local retailers? While it’s true that local retailers do not pay the sales tax, customers do, the lure of no sales tax to the customer may pull revenue away from local retailers. The result is lower tax revenue for the state.
Of course, most states do have a “use tax” that requires the end purchaser to pay the equivalent of sales tax on items that they buy without paying tax at the sale. Realistically, however, this doesn’t happen. Consumers are not paying use tax on items purchased over the internet. They just aren’t.
The alternative - this idea of paying sales tax in every state where you make a sale - is a complicated calculation for online retailers. Sales taxes vary from state to state, and also from city to city. In my own state of Pennsylvania, our sales tax is 6%. But I pay an additional 1% for the privilege of living in Philadelphia (yes, that’s how I choose to characterize it, since it makes me feel better). The rules governing sales tax are subject to the individual charters and rules within each state or municipality - and the rates are constantly changing.
If each state decides to follow New York’s lead, it could be costly for online retailers from an administrative perspective. This, I get.
Taxing online sales has been hyped before in California (for iTunes, no less) but didn’t get very far. The opposition to that tax raised many of the same issues as here. But maybe New York’s law will change that - after all, New York doesn’t have nearly the pressure of computer and tech giants breathing down its neck as California does.
So what does it mean? I personally don’t buy the argument that an increase in tax will cause consumers to go elsewhere… The tax is minimal and is no more than a consumer would pay by going to an actual store. Additionally, if the tax is imposed on all online and in person retailers, where else will the consumer go? The idea that this increase will cause some kind of mass exodus in online retail sales is, I think, bogus.
The issue, I think, is more appropriately whether it is fair this late in the game to change the rules.
Amazon.com and Overstock.com don’t think so. The online giants have already signaled that they will challenge the New York law.
You can read the official memo from the New York State Department of Taxation and Finance here.
I want to know: is sales tax a factor in your decision to make an online purchase? Would you stop buying online if you had to pay sales tax? Why or why not?
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