Breaking Views

States fire shots in Internet sales tax war

A new battle is brewing between online retailers and cash-strapped states.

By Jeff Segal, breakingviews.com

(breakingviews.com) -- A battle is brewing over U.S. state sales taxes on online purchases. Internet retailers Amazon.com and Overstock.com are scaling back their operations in states that demand they collect these taxes. While this won't dent their revenues much, it foreshadows a larger clash over the taxation of internet commerce. Cash-strapped states are firing the first shots.

Most online sales escape being taxed because internet firms only collect them in states where they have a physical presence. (Buyers are legally bound to pay them, but many do not.) However, Amazon (AMZN, Fortune 500) and Overstock (OSTK) allow independent companies to sell merchandise through their systems for a fee. This means the online giants have to collect taxes in any state where their independent partners have operations.

New York passed a law last year implementing this rule. Amazon and Overstock both challenged it in court and lost. Now Hawaii, North Carolina and Rhode Island have passed similar measures. In response, both companies have cancelled their so-called associate programs in those states.

That's not too painful; only about 10% of Amazon's sales come from associate sales, according to Forrester Research. And these indirect sales generate lower margins than the company's main business.

But it could become a bigger problem over time. The amount of business done online has grown rapidly -- it is expected to hit nearly $160 billion this year, says Forrester. That has led bricks and mortar retailers -- which feel at a disadvantage because they must collect sales taxes -- to call for online retailers to be required to do so also. States desperate for more revenues are beginning to agree.

Indeed, there's no reason why online retailers shouldn't be forced to collect sales taxes like other businesses. They once argued that doing so would inhibit the growth of online businesses. But that's clearly an out-of-date position. Tax codes should be updated to reflect the growing importance of internet commerce. To top of page

Company Price Change % Change
Bank of America Corp... 17.62 0.09 0.51%
Apple Inc 111.78 -0.87 -0.77%
General Electric Co 25.62 0.48 1.91%
Intel Corp 36.37 -0.65 -1.76%
Microsoft Corp 47.66 0.14 0.29%
Data as of Dec 19
Index Last Change % Change
Dow 17,804.80 26.65 0.15%
Nasdaq 4,765.38 16.98 0.36%
S&P 500 2,070.65 9.42 0.46%
Treasuries 2.18 -0.03 -1.27%
Data as of 10:02pm ET
More Galleries
These 10 food trends could dominate 2015 So long, kale. Here's what's expected to shake up the food industry next year. More
Beyond Russia: Geopolitical hot spots in 2015 Investors beware: These 5 global crises are likely to rattle the stock market and world economy. More
These 20 antique guns could fetch big bucks Morphy Auctions in Pennsylvania is putting nearly 1,000 old guns on the block. Here are just a few. More
Worry about the hackers you don't know 
Crime syndicates and government organizations pose a much greater cyber threat than renegade hacker groups like Anonymous. Play
GE CEO: Bringing jobs back to the U.S. 
Jeff Immelt says the U.S. is a cost competitive market for advanced manufacturing and that GE is bringing jobs back from Mexico. Play
Hamster wheel and wedgie-powered transit 
Red Bull Creation challenges hackers and engineers to invent new modes of transportation. Play

Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer.

Morningstar: © 2014 Morningstar, Inc. All Rights Reserved.

Factset: FactSet Research Systems Inc. 2014. All rights reserved.

Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved.

Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor’s Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2014 and/or its affiliates.