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States Go After E-commerce Marketplaces Like Amazon Over Sales Taxes

Time may be running out for online retailers—and third-party marketplace sellers—that have been able to skirt paying sales taxes thanks to a Supreme Court ruling from 1992.

In addition to the possibility that the high court might address the matter again soon, several states are enacting laws related to sales taxes and the Internet—but they’re giving e-commerce marketplaces the ability to have the past taxes and penalties the states feel they’re owed forgiven.

South Dakota, Texas, Florida and Colorado are among the 23 states, along with the District of Columbia, participating in the Multistate Tax Commission National Nexus Program, which offers marketplaces like Amazon’s a limited-time amnesty from unpaid back state taxes, penalties and interest. The program, which began on August 17 is scheduled to run through October 17, maybe be extended following retailer requests. It is only available to sellers or retails that agree to start filing tax returns and paying taxes as well as income/franchise taxes, where applicable.

Any state laws applying sales tax rules to out-of-state online retailers would run afoul of Quill v. North Dakota. The 25-year-old U.S. Supreme Court ruling found that only those retailers with a physical presence in a state had to pay taxes on goods sold there. And while the ruling may not have made many waves then, the volume of e-commerce transactions taking place today has everyone’s attention—including the president.

In August, Donald Trump put a spotlight on Amazon in particular in a tweet, saying “Amazon is doing great damage to tax paying retailers. Towns, cities and states throughout the U.S. are being hurt — many jobs being lost!”

The tweet, though, is misleading at least regarding Amazon’s current tax situation. Although the online giant didn’t pay state sales taxes in the past, it does now for the products it sells directly. Taxes related to items sold via the marketplace—which offers more than 2 million items from third-party sellers—are left to those vendors to sort out—or opt out, as the case may be.

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And that’s exactly the issue. States claim they’re losing millions of dollars a year as a result of Quill so they’re now taking matters into their own hands. Some are going after the retailers, as South Carolina is by suing Amazon for $12.5 million, while others are attempting to collect from the sellers themselves, which is Massachusetts’ gambit. If the latter action is successful, James Thomson, a former Amazon senior manager, says “it’s going to be a bloodbath.”

The most notable legal action on the topic is South Dakota’s appeal to get the U.S. Supreme Court to hear its case after a law that requires any retailer doing more than $100,000 in online sales or conducting 200 transactions to collect it 4.5% sales tax was tested and shot down in the state Supreme Court.

[Read more about the South Dakota case: Online Sales Tax Fight Expected to Land in U.S. Supreme Court]

And other states are watching the case closely. Bloomberg quotes Minnesota Senator Roger Chamberlain as saying, “We’ve been waiting many years for the federal government or the courts to tackle this issue and they haven’t. It’s a fairness issue. Right now, there’s an unlevel playing field that disadvantages brick-and-mortar stores.”

In the meantime, the issue is keeping state lawmakers busy. When it was raised in an Arkansas tax overhaul task force meeting, Senator Jim Hendren requested someone determine how much the state has lost by not collecting Internet sales taxes. While estimates put the number at $100 million a year, the Arkansas Democrat-Gazette said state officials remain unsure.

Hendren is asking lawmakers to pin down a number so the state can determine how much that revenue could offset tax relief plans in other areas.

The state had attempted to pass legislation similar to the South Dakota law, requiring companies without a physical presence in Arkansas to collect sales tax on goods sold to residents but it didn’t pass.

Hendren anticipates the nation’s highest court could help the tax code catch up with technology. “I think probably in the next year or so, the U.S. Supreme Court probably is going to weigh in and some of this may then become clearer,” he said.

In Sugar Land, Texas the city has raised property taxes amid sagging sales taxes, a problem e-commerce is exacerbating, according to city officials.

“[Consumers] are spending more of their money on online purchases, and we may not be getting that sales tax revenue,” budget officer Justin Alderete said to the Community Impact Newspaper, adding it is contributing to the city’s woes.

Traditional retailers are hoping that the high court hears the South Dakota case, and takes the opportunity to get with the times, closing the online “loophole.”

“Practically speaking, Quill enabled online retailers like Amazon to begin selling products with a commercial advantage because they were excused from collecting the sales tax that most consumers do not know is already due and that brick and mortar retailers collect on behalf of the state every day. In the twenty-five years since the Quill decision, online commerce has reached proportions that were unimaginable in 1992 and resulted in unintended economic consequences for state governments and local retailers alike,” the Retail Litigation Center said in a statement.

If there is a new decision overturning the 1992 ruling, the industry will have to wait to see if it’s the marketplace or the sellers that are ultimately responsible for paying the taxes.