The state budget crisis has put nearly all public services under intense scrutiny. With most state agencies taking cuts of 15 percent or higher, and more cuts expected, public officials have been forced to streamline operations, eliminating both waste and many useful programs.
With states hurting everywhere, they are also beginning to look at holes in the tax code that lack any good rationale. One glaring example is sales tax collections for online purchasers. Many states, including Oklahoma, require residents to pay taxes for online purchases, but they put the burden on individual taxpayers to identify how much tax is owed when filing their tax return.
Collecting in this way is highly inefficient, and it subsidizes large online retailers like Amazon at the expense of Main Street businesses who directly employ Oklahomans. Since they aren’t required to include sales tax in their prices, online retailers are able to undercut local business and move more money out of the state. Untaxed remote sales also starve state and local governments of resources – an estimated $92.7 million for Oklahoma in 2009, rising to $156.3 million in 2012.
The US Supreme Court ruled in 1992 that retailers who lack a physical presence in a state, or “nexus,” cannot be required to collect tax. In response, several states have expanded the definition of “nexus” to include affiliate programs, such as when Amazon pays a commission for links that result in sales.
Even in states where Amazon does have a nexus, the company has tried to avoid taxes. The Center on Budget and Policy Priorities found that Amazon charges tax in only four out of seventeen states where it operates facilities. Texas recently billed Amazon for $269 million in uncollected taxes when it discovered the company was operating a warehouse in the state through a subsidiary.
The fight is heating up. Every state bordering Oklahoma has either required Amazon to collect sales tax or cracked down on the company’s tax avoidance strategies. Most recently, Arkansas passed a bill to require online retailers that have affiliate programs and make more than $10,000 a year in sales to collect sales tax. Similar legislation has passed in five other states and is being considered in at least 10 more.
Amazon ended affiliate programs in several states and closed down its warehouse in Texas. Yet with more states and local retailers joining the fight against the exemption, it may not be long before Amazon loses the ability to play some states against others.
Oklahoma continues to struggle with balancing its own budget, and Gov. Fallin has called for more ideas on how to protect core services from harmful cuts. Just as difficult budget years can push us to make government programs more efficient, it is a good time to close unfair loopholes in the tax code. While we may end up paying a little more for online purchases, the benefits to local business and the reduced strain on public services will make us all better off.