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 But that's clearly an out-of-date position.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... 17.03 0.00 0.00%
Apple Inc 126.44 0.00 0.00%
Intel Corp 30.56 0.00 0.00%
Micron Technology In... 19.07 0.00 0.00%
General Electric Co 26.78 0.00 0.00%
Data as of Jul 2
Index Last Change % Change
Dow 17,730.11 -27.80 -0.16%
Nasdaq 5,009.21 -3.91 -0.08%
S&P 500 2,076.78 -0.64 -0.03%
Treasuries 2.39 -0.02 -1.03%
Data as of 6:50pm ET
More Galleries
Graffiti about Greek crisis fills Athens' streets Artists are taking to the streets to express their views on the Greek crisis. More
My whirlwind 24 hours in Taiwan as a bridal supermodel Unlike the West, Taiwanese brides-to-be sit for hun sha ?? photo sessions before their actual wedding day. The photos are seen as a status symbol as well as a way to capture the brides' youth and glamor. More
8 startups that'll make your travel experience so much better Here are the new travel apps and services that will make trips easier, less time-consuming, and more fun for the every day business traveler. More
Sponsors
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