Taxing Times Call for (Internet) Taxing Measures

Online retailers should prepare for a new front as state lawmakers and revenue authorities become more creative in finding ways to make sure that Internet transactions don't escape sales or similar taxes. Catalog companies should pay attention to this as well.

State officials have been frustrated by their inability to require e-commerce vendors like Amazon and the like collect sales taxes when they do not have a physical presence in a state. (Note: for clarification, consumers in states where Amazon or a similar vendor has a distribution center, for example, do have to pay sales tax.) In recessionary times, this seems like a major loss of revenue. And, local bricks-and-mortar retailers, who must collect sales taxes, feel at competitive disadvantage to their virtual peers.

Some states have mounted litigation to overcome Supreme Court precedent about taxing out-of-state merchants. But others aren't waiting for resolution of such efforts and are trying a new tack. They are looking to the "use" tax, which is what consumers are supposed to pay when purchasing from out-of-state sellers. However, it has been much easier to enforce the sales tax from relatively few retailers, compared to policing the use tax against all citizens.

In a twist, there are recent reports that state authorities are trying to require online retailers to provide customer data so that tax bodies can pursue use tax claims against them. For instance, North Carolina recently made a request for such information to Amazon that sent alarm bells ringing, including about potential privacy claims.

It is too early to say how this will all play out. However, sooner or later, in this time of state budget deficits, it is quite likely that the loophole for online (and catalog) sales will be plugged one way or another.

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