The slow march toward a more rational sales tax continues. On Thursday, Amazon.com (and other e-retailers) will begin collecting and remitting sales taxes owed by Michigan customers. Once this happens, the share of the country’s population living in states where Amazon collects sales tax will pass the 80 percent mark.
For years, online retailers’ refusal to participate in state sales tax systems has allowed shoppers to evade the tax by purchasing items from out-of-state companies via the Internet (companies that have a “physical presence” in a state must collect sales tax in that state, both on purchases made over the Internet and in “brick and mortar” stores). When e-retailers don’t collect sales taxes legally owed by their customers, that responsibility falls directly on the customers themselves and the tax becomes all but unenforceable. The result is a system where items purchased in state at traditional stores are taxed, while those ordered from afar are effectively tax-free.
For years, Amazon.com was the poster child for this tax enforcement nightmare. As recently as 2011, the nation’s largest online retailer only collected sales tax in five states: Kansas, Kentucky, New York, North Dakota, and its home state of Washington. With Amazon’s shift toward emphasizing faster delivery times, however, the company has been opening distribution centers in a growing number of states and has come within reach of those state’s sales tax collection laws as a result.
The addition of Michigan as the 26th state where Amazon collects sales tax does not solve all of the problems associated with online sales tax enforcement. The company is still shirking its tax collection responsibility in nearly half the states, despite its demonstrated ability to comply with those laws in states and localities stretching from coast to coast. And thousands of other e-retailers with less recognizable brand names are continuing to dodge sales tax collection laws as well.
A comprehensive solution will require action by Congress. Legislation along the lines of the Marketplace Fairness Act, which passed the Senate in 2013 and is supported by President Obama, could empower states to require that all e-retailers collect sales tax from their customers. But with gridlock having long ago having become the norm inside in the Beltway, most observers aren’t betting on that reform making it to the President’s desk anytime soon.