States look to cash in on Internet retail taxes

Associated Press

AUSTIN, Texas

State governments across the country are laying off teachers, closing public libraries and parks, and reducing health care services, but there is one place they could get $23 billion a year if they could only agree how to do it: Internet retailers such as Amazon.com.

That’s enough to pay for the salaries of more than 46,000 teachers, according to the U.S. Bureau of Labor Statistics. In California, the amount of uncollected taxes from Amazon sales alone is roughly the same amount cut from child welfare services in the current state budget.

But collecting those taxes from major online retailers is difficult.

Internet retailers are required to collect sales tax only when they sell to customers living in a state where they have a physical presence, such as a store or office. When consumers order from out-of-state retailers, they are required under state law to pay the tax. But it’s difficult to enforce and rarely happens.

That means under the current system the seller is absolved of responsibility, buyers save 3 percent to 9 percent because they rarely volunteer to pay the sales tax, and the state loses revenue.

With sales tax revenue slumping more than 30 percent in most states between 2007 and 2010, lawmakers across the country are grasping for ways to collect those unpaid taxes. Retailers and lawmakers in several states have proposed ways to solve the problem, some with more support than others.

“The problem is that some out-of-state e-retailers openly flaunt the law, arguing that it doesn’t apply to them,” said Texas state Democratic Rep. Elliot Naishtat, who has offered a bill to require more Internet sellers to collect Texas sales tax. “It’s about potentially generating hundreds of millions of dollars for our state.”

Texas cut $24 billion in state services to cover its revenue shortfall. That included decisions not to fund the expected growth in the number of public school students and the expected growth in the caseload for Medicaid, the health care program for the poor and disabled.

Internet retailers cite a 1992 U.S. Supreme Court decision involving catalog sales, Quill Corp. v. North Dakota, which ruled that states could require only companies that had a physical presence within the state to act as tax collector.

To get around the ruling, some states are expanding what it means to be physically present. For example, an online retailer hiring a marketing firm or owning a subsidiary inside the state would qualify under definitions adopted in some states.