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How Amazon Benefits from Local Sales Tax Loopholes

Retail technology is not only outpacing many stores’ ability to keep up, it’s light years ahead of some state and local governing bodies. As a result, local shops are sometimes losing out to e-commerce when it comes to sales taxes, with these home-grown businesses having to collect on sales while their online counterparts do not.

Because most laws covering this area were written before online shopping either existed or became the norm, some regions either don’t charge local sales taxes to online retailers or do so at a lower rate. And being the 800-pound gorilla in the room, Amazon is a lightening rod for the issue.

The online giant has been singled out in the Institute on Taxation and Economic Policy’s latest report. However, the report authors are quick to note they’re not accusing Amazon of any misdeeds. Rather they’re using the online retailer to illustrate how governments are doing themselves a disservice by failing to enact and enforce laws to protect local businesses.

While Amazon now collects sales taxes in all states that require it, it hasn’t always done so. Additionally, this practice is only true for the company’s direct sales. Sales through its marketplace are not automatically charged; it’s up to the individual sellers to opt to do so. Periodically, the issue hits the headlines thanks to President Trump, who has been known to feature Jeff Bezos in his tweets.

The ITEP found that in seven states, the gap between what Amazon collects in local sales taxes, or equivalent local use taxes, and what retailers based in those states must collect ranges from 1 percent to as much as 7.5%.

ITEP’s Carl Davis told The New York Times that local governments are penalizing businesses and cheating themselves out of millions of dollars, which could be used to support their citizens and infrastructure. “It’s just a direct price advantage that shows up on customers’ receipts,” he said. “You never want to end up in the situation where the companies you’re offering better deals to are the ones that don’t even have roots in your community.”

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Who’s charging what where?

Ultimately, what online retailers like Amazon charge varies by state law. For instance, Idaho, Iowa and Mississippi, don’t charge use taxes on interstate sales.

In other states, local sales taxes are collected based on the location of the seller rather than the buyer. As a result, Amazon is exempt from charging sales tax in New Mexico because it has no presence there. Though the company does have fulfillment centers in Pennsylvania, another so called “origin-sourced” state, those facilities aren’t located in regions that levy local sales taxes.

In Alabama, the legislature has decided to assess an 8-percent sales tax on online transactions, a rate which works out to be about the average amount that local businesses pay for state and local sales taxes combined, depending on where they’re located. As a result, Amazon still has an advantage over some other businesses, a fact that ITEP calls “indefensible.”

Finally, Alaska doesn’t charge a state sales tax though a few jurisdictions do. Unfortunately, ITEP says this means the state has little motivation to go to bat for local businesses. “Alaska localities’ best recourse may be to urge state lawmakers to put pressure on Amazon to begin collecting local sales taxes by enacting a remote sales tax reporting law similar to Colorado’s, or by including local tax collection as a requirement in any future tax incentive offers,” the report noted.

What can be done?

Thanks in part to Quill v. North Dakota, a 25-year old Supreme Court ruling that said states can’t require non-resident companies to collect sales taxes, many online retailers have a competitive advantage. But states have begun agitating against the ruling, increasing the likelihood that the matter will be taken up by the high court again soon.

The ITEP said that overturning Quill would only be the first step toward creating a fair system for local businesses, however. What it will take, the policy group said, is for local governments to address the loopholes and enforce their laws.

“Without changes in law, these localities will continue to see their tax bases eroded as consumers increasingly shop online, and local businesses in these communities will continue to face an unlevel playing field as they collect local sales taxes that out-of-state online companies can (or must) forego collecting,” according to the report.

While local sales taxes only amount to a 1 percent to 3 percent differential between online and physical store prices in most affected places, it’s still a point of contention for local businesses. “The 2 percent doesn’t drive someone from my place to Amazon, but it doesn’t help,” Richard de Wyngaert, owner of Head House Books, an independent bookstore in Philadelphia, told The Times. “I just feel that if not all businesses, why any business? If we don’t all pay taxes, why should any of us? To me, it’s ludicrous. There is a social contract with your citizens.”