April 12, 2011

Tax Battle Royale: Amazon vs. the State of Illinois

A report on NPR caught my interest the other day as it mentioned that Amazon was locked in battle with the State of Illinois over whether Amazon is required to pay sales tax or not.

 The crux of the argument is that in 1992 the Supreme Court ruled, in a decision known as Quill, that internet companies were not required to pay sales tax to states in which they do not have a physical presence.  The decision was based on catalog companies which follow the same format – if they do not have a physical presence in a state to which they’re sending goods then they’re not required to collect sales tax.

 Now that states are hurting for revenue though they’re realizing what a huge missed opportunity this is for them.  It’s estimated that approximately $20 billion in sales tax is uncollected due to sales made to their residents via the internet or through catalogues.   Illinois argued that since Amazon has affiliates in Illinois – companies and websites that direct traffic to Amazon’s website – that they do indeed have a presence in the state and should be required to collect sales tax.  Amazon’s response was swift – they contacted all their affiliates in Illinois and said that as of April 15 they would no longer do business together.

From the small food business standpoint this raises the sticky issue of whether or not we will one day be responsible for collecting sales tax on internet sales.   Right now the law technically states that individuals are supposed to pay sales tax on items they’ve purchased online but with states deeply in debt and looking for ways to dig out, it wouldn’t be totally surprising if they tried to change the law and make it necessary for anyone who engages in e-commerce to collect and report the sales tax. 

 Currently here in Washington state, since my business is based here, my business is responsible for collecting sales tax for all retail orders that are shipped to in-state residents but not to any out-of-state residents.  What makes it more complicated is that I’m required to charge the sales tax based on the local rate for that specific zip code and then I have to submit the local sales tax to each individual city or county. You can imagine the headache and hassle that would come about if you had to collect sales tax based on local tax rates for each zip code in the entire country and then had to submit those forms to the appropriate tax departments.  We’re obviously not there yet but it’s a threat that seems to be hovering in the horizon.