Online Sales Tax: While Rome burns and Congress fiddles, states can act

The problem of untaxed Internet sales is gaining new prominence.  As we wait on Congress for a permanent fix, there are actions that Oklahoma can take immediately to create a more level-playing field for our local brick-and-mortar businesses.

The Oklahoma Tax Commission has estimated that Oklahoma state and local governments are losing $200 million every year when people buy products online and don’t pay the required tax. The ability to sell goods tax-free creates a significant competitive advantage for online retailers over the brick-and-mortar businesses in our cities and towns. According to former Governor Brad Henry, the jobs of more than 170,000 Oklahomans – more than 10 percent of the state’s workforce – may be at risk. Governor Henry is a member of the Bipartisan Policy Committee’s Governor Center, which hosted a recent forum on the subject in Oklahoma City.

In Oklahoma, state and local tax – formally known as a ‘use tax’ –  is owed on purchases regardless of where the seller is located and regardless of whether the seller charges the tax. However, the US Supreme Court ruled in 1992 that retailers who lack a physical presence in a state, or “nexus,” cannot be required to collect and remit tax. This means that an online retailer like Target.com, which has brick-and-mortar stores in Oklahoma, collects sales tax on online purchases from Oklahomans, while other online retailers, like Amazon.com, do not. While Oklahoma encourages taxpayers to pay the tax they owe on their online purchases when they file their annual taxes, only about 3 percent of filers actually do so.

Everyone agrees that the best approach to leveling the playing field is for Congress to take action to allow states to require the collection of taxes from all but the smallest online retailers. Legislation such as the Marketplace Fairness Act has support from a broad coalition of national and local trade associations, state and local government organizations, and businesses. To address concerns from retailers about complying with multiple state and local laws, the Act requires states to adopt the Streamlined Sales and Use Tax Agreement, to which 24 states, including Oklahoma, already adhere, or to implement comparable simplifications.  Although some are optimistic that Congress will pass the Marketplace Fairness Act or similar measures this year, none of the bills introduced in Congress have advanced.

Counting on Congress to fix this problem, or any problem these days, is a major gamble. In the absence of Congressional action, states can and should do what they can to expand tax collections on online sales. The main approach adopted by a growing number of states is to pass so-called “Amazon laws.” Under these laws, arrangements that provide compensation to state residents for linking their websites to a company such as Amazon’s website (i.e. affiliate programs, or “click-throughs”) are deemed to establish nexus and require tax to be collected.  New York passed the first Amazon law in 2008; nine other states (Arkansas, California, Connecticut, Illinois, North Carolina, Pennsylvania, Rhode Island, Vermont and, most recently, Georgia) have followed suit. Amazon and Overstock.com have responded by terminating their affiliate programs in states enacting ‘click-through’ laws. However, if enough states follow suit and enact similar laws, then online retailers are likely to eventually drop their opposition and begin to collect sales tax.  Vermont’s Internet affiliate law sets up a trigger whereby it takes effect only once 15 or more states pass similar laws.

Oklahoma took a helpful first step in 2010 when it passed legislation requiring remote sellers to disclose to their customers that they may owe tax on what they are buying even though the seller is not charging the tax. If Oklahoma were to enact an ‘Amazon law’ that requires businesses operating ‘click-through’ programs to collect sales tax, it won’t resolve the issue of the taxation of online sales. It would, however, signal our recognition of the seriousness of this issue and help spur Congress to adopt the national solution that is so urgently needed.

ABOUT THE AUTHOR

David Blatt helped found OK Policy in 2008 and became the organization's Executive Director in 2010. David previously served as Director of Public Policy for Community Action Project of Tulsa County and as a budget analyst for the Oklahoma State Senate. He has a Ph.D. in political science from Cornell University and a B.A. from the University of Alberta. David has been selected as Political Scientist of the Year by the Oklahoma Political Science Association, Local Social Justice Champion by the Dan Allen Center for Social Justice, and Public Citizen of the Year by the National Association of Social Workers. He lives in Tulsa with his wife, Patty Hipsher, a special education teacher in Broken Arrow, and their son, Noah.

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