Internet sales tax scofflaws cheat state
On this glorious day before Christmas, I have a message for all you sales tax scofflaws out there:
This means you. You, who bought your big-screen TV online from Amazon.com instead of at Best Buy and your fleece-lined parka from L.L. Bean instead of Eddie Bauer because Amazon and Bean don’t charge you sales tax and the others do.
Guess what. You owe it anyway.
Skipping out on the sales tax due on online purchases is the single biggest category of “noncompliance” with California sales tax law, according to the state Board of Equalization, accounting for nearly 30% of all unpaid tax.
The board estimated lost revenue at $1.1 billion annually. To put that figure in perspective, it would pay the salaries of more than 15,000 California schoolteachers for a full year. And it may be conservative, given the explosion of Internet commerce in recent years.
Tax experts say there are two main reasons a huge volume of online sales don’t get taxed. One is that most individual taxpayers aren’t aware that it’s owed. (If you’ve read this far, you no longer have that excuse. Sorry.)
The second is that the state makes almost no effort to enforce the law. The main reason is that it calculates that the average California household owed $47 last year in taxes on online purchases, which rules out a house-to-house search for untaxed goods. Tax authorities keep their eyes out for big-ticket out-of-state purchases like boats and cars, but other than that you’re almost certain to skate unless you get audited for other reasons.
There’s no question that ignorance of the sales tax rules has been, for millions of taxpayers, bliss. So let’s get a few things straight.
First, in technical terms we’re talking not about “sales tax” but “use tax.” The former is collected by the seller of an item and remitted to the state. The latter is paid directly by the purchaser. But they’re otherwise identical, so the terms are often used interchangeably.
Second, the use tax isn’t new -- it was created in California in 1935 to deal with residents who slipped over the border to make purchases in states without sales taxes -- the ‘30s equivalent of funneling all your purchases through Amazon.com.
Finally, there’s nothing illegal about it. Some people may think that online sales taxes run afoul of the 1998 federal Internet Tax Freedom Act, which forbids state taxation of Internet services -- your monthly access fee, for example.
But the act doesn’t bar sales taxes on online purchases unless they discriminate against online commerce, as they would if they’re imposed on goods or services that would be tax-free if bought from a neighborhood store.
The legal provision that is pertinent, however, is the commerce clause of the U.S. Constitution, which has been held to prohibit any state from imposing a tax on an entity lacking a “nexus” in that state. In practice, a “nexus” means something like a bricks-and-mortar store or a sales office.
EddieBauer.com adds California sales tax to Californians’ online purchases of its clothing because it has more than a dozen retail outlets in the state. L.L. Bean doesn’t add sales tax because it has no operations in California.
Occasionally a merchant tries to pull a fast one. In the 1990s, Barnes & Noble tried to claim that its barnesandnoble
.com online retail site was completely separate from the B&N stores in every mall.
The state finally got B&N to concede in 2008 that the two sides of its coin were related. Today, bn.com charges sales tax on purchases from almost every state. In the meantime, the Legislature passed a measure stating that an online retailer was presumed to operate in the state if it also had retail locations in the state. It was vetoed by Gov. Gray Davis, who contended it would stifle the Internet’s “full potential” and sully California’s image as the “incubator of the dot-com community.”
But Davis had his eye on the wrong ball. The real damage from the lack of Internet taxation was being done to local businesses forced to compete with online retailers operating with a built-in 7% or 8% price advantage. Indeed, it was a coalition of Northern California bookstores that got the state to go after Barnes & Noble.
Today the major resistor against online collection of sales tax is, unsurprisingly, Amazon.com, the world’s largest online retailer. Amazon, which has no retail stores anywhere, has become a target of state tax collectors because as its business has expanded, so has the value of its inventory.
Once a purveyor of modestly priced books and videos, Amazon now offers big-ticket electronics and more. I found a men’s titanium watch on its website priced at $92,000. Buy it at your local jeweler, and you’d pay about $7,400 in tax.
New York state mounted the most recent assault on Amazon’s position, passing a law declaring in effect that Amazon’s “associates” -- website operators who place an Amazon link on their pages and get paid a piece of any transaction that ensues -- constitute a nexus if they’re located in New York.
Amazon’s lawsuit challenging the law was tossed out by a state judge this year, but it’s now under appeal. California is considering a similar law.
At least one of Amazon’s claims is worth a horselaugh. This is that sales tax rules are so “horrendously complicated,” with some 20,000 separate jurisdictions nationwide to track, that it’s an “undue burden” to force Amazon to get it all right. (The words are from Amazon Chief Executive Jeff Bezos at the company’s annual meeting last year.)
This from a company that has no problem keeping track of the “millions of unique products” it sells. (These words are from its 2009 annual report.)
Nothing is stopping Amazon from creating a database encompassing every sales tax jurisdiction in the country, even leasing it out to other online merchants for a fee. It’s fair to speculate that its real reason for resisting New York’s initiative is to maintain its price advantage over the schnooks forced to collect sales tax online or at the cash register.
From a tax collector’s standpoint, the important principle is that the only effective way to collect sales and use tax is to have the merchant do it. For the last few years California income tax returns have included a line inviting taxpayers to volunteer how much use tax they owe. Last year 44,000 taxpayers used the line -- out of 18.5 million filers in the state. They paid $9 million, or about three-quarters of one percent of what the state thinks it’s owed.
So the next time you turn your attention to some person or class you believe is getting away with murder on state taxes, think about all those receipts in your drawers from online merchants reading $0.00 on the sales tax line.
And on Christmas Day, when the subject of who’s been naughty or nice comes up, remember that in this one little particular most of us have been naughty.