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Online Retailers Grapple with Sales Tax

A long-standing Supreme Court decision limits the states' ability to collect sales tax from online retailers.

sales tax against online retailers

If you ordered a book from Amazon.com and you weren’t charged any sales tax, give thanks to the U.S. Supreme Court.

A longstanding U.S. Supreme Court decision limits the ability of states to collect sales taxes from out-of-state retailers as long as the businesses have no physical presence in the state. For instance, if you order an item from an online retailer that only has a physical presence in Seattle, you won’t have to pay sales tax if you live in Ohio.

It’s a good system for consumers, but a tough one for states. The majority of states, after all, are battling severe budget deficits these days. They can use any financial help they can get, including sales taxes from online retailers.

Some states have fought back. For instance, the New York State Department of Taxation recently passed a law that requires out-of-state retailers to collect sales taxes from New York consumers. Amazon.com didn’t like this. It filed a lawsuit against the state saying that it had no physical presence in New York and, therefore, should be not required to charge sales taxes on its New York customers.

The New York state courts saw things differently. In January of 2009 the New York courts threw out Amazon.com’s lawsuit. Now Amazon.com, along with other online retailers such as Overstock.com and Zappos.com, are charging sales taxes on the orders they deliver to New Yorkers.

Don’t expect the New York case to be the last. Key politicians have been fighting for years to require the collection of sales taxes on all out-of-state purchases. There’s a simple reason for this: Online sales have been increasing steadily for years. States are missing out on a lot of money thanks to the Supreme Court’s decision.

Just look at the online sales racked up by the nation’s biggest e-tailers in 2009: Amazon.com recorded sales of $19.2 billion, while Staples notched $7.7 billion of online sales. Third-place finisher Dell recorded $4.8 billion of online sales, a figure that Office Depot matched. Apple had sales of $3.6 billion, while OfficeMax notched sales of $3.1 million.

Sears enjoyed online sales of $2.7 billion in 2009. Following close behind was CDW, which had $2.6 billion of online sales throughout the year. Newegg recorded $2.1 billion of online sales in 2009. Bringing up the rear of the top-10 was Best Buy, with online sales of $2 billion in the year.

Of course, state governments wouldn’t have to fret about these lost sales taxes if U.S. consumers did their jobs when filing their taxes. Consumers who live in states that have sales taxes are legally required to track their out-of-state purchases and report these “use taxes” on their income tax returns on April 15. Of course, very few consumers actually do this.