The voices of Tax Policy Center's researchers and staff
Yesterday morning (at 3:12 AM) President Trump Tweeted this: "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 president’s Tweet is pretty cryptic--unless you are a sales tax geek. It implies that the on-line retail giant does not pay taxes that other retailers pay. If he is talking about income taxes, this was never true. If he is talking about sales taxes, it was once true, after a fashion, but is no longer.
Nonetheless, Trump has waded into a related, and very interesting, issue: Should government require firms that serve as online platforms for third party sellers to collect tax on their behalf?
Beyond mail-order catalogues
I don’t think so. But before I explain why, let’s sort through the complexities of online sales taxes.
To start, the issue is not whether online sellers should pay sales taxes. Retailers don’t pay sales taxes, consumers do. And buyers owe those taxes (called use taxes) to their home states whether retailers collect them or not.
For decades, states, the courts, and the retailers themselves have been trying to sort out how this works. In 1992, when it was mostly thinking about mail-order catalogues, the US Supreme Court ruled that states could compel sellers to collect sales taxes only if they had some physical presence, such as a warehouse or storefront, in their jurisdiction. Recognizing the potential confusion this would create, the High Court urged Congress to create a uniform federal law to govern those collections.
For 25 years, Congress has done nothing, leaving the states to head off on their own to define what physical presence means. In the midst of this growing confusion, Amazon—once a strong foe of online collections—now voluntarily collects in every sales tax state, whether it has a physical presence or not. So do most, though not all, of the big e-tailers.
But Amazon has two business models. It sells directly to consumers and provides a platform for smaller retailers to do so. The distinction is largely invisible to buyers, but there is one big behind-the-scenes difference: While Amazon collects tax on everything it sells directly, it does not do so for those third-party sales.
At least two states, Minnesota and Washington, have recently passed laws that require Amazon and similar firms to collect for retailers that sell through their platforms. In June, South Carolina filed a legal claim against Amazon for back taxes the state says the firm should have collected for those third-party retailers. Joe Henchman and John Buhl at the Tax Foundation have a nice description of the state of play here.
Who should collect third-party taxes?
But why should either federal or state government require these platforms to collect sales taxes? The retailers that sell through Amazon, eBay, and the like absolutely should have an obligation to collect and remit to the appropriate state. But Amazon-as-platform isn’t selling a product. It is merely providing a way for someone else to sell.
I suspect that Amazon and others would happily calculate and collect sales tax for their retail partners, for a modest fee. It would benefit both smaller retailers and state and local governments, all of which would save on administrative costs. It would also eliminate headaches for consumers who otherwise would have to leave Amazon and go to the retailer’s site just to be billed for the tax—a process that defeats the convenience of the online marketplaces in the first place.
Having a distributor collect and remit taxes follows a common practice. This already happens with excise taxes on liquor and tobacco and most recently, on sugar-sweetened beverages or soda.
A need for uniformity
There are plenty of other online sales tax issues that would benefit from the uniformity that federal law can provide. For example, should state sales taxes be based on the jurisdiction of the seller or the buyer? And if the answer is the buyer—as it should be-- should it be collected at her billing address or her mailing address? And, going back to that 1992 Supreme Court case, what is physical presence anyway and should it even matter?
Yesterday’s Tweet wasn’t the first time the president has tackled this issue. In June, he Tweeted that Amazon “isn’t paying Internet taxes,” a claim that is equally muddled (there is no Internet tax). Much of Trump’s criticism may be the result of his ongoing feud with Amazon CEO Jeff Bezos, who also owns The Washington Post, a news organization that is often critical of the president. But whatever his motives, the president has raised an interesting tax policy question. Congress ought to answer it.
Posts and Comments are solely the opinion of the author and not that of the Tax Policy Center, Urban Institute, or Brookings Institution.