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How Amazon's Unfair Practices Are Worsening State Budget Crises

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I love Amazon. Our family is a Prime member and, living in New York City without a car, we order from Amazon what feels like every other day. And their service is fabulous, with usually next-day diaper delivery for our new baby and customer service where you reach a real human being instantly. And pretty much a no-questions-asked return policy.

So with such great service and wide popularity with its customers, why does Amazon feel it can only compete with an unfair tax advantage?

As I detailed here, Amazon is unfortunately leading the political charge against states seeking to require online retailers to collect sales taxes on goods sold in their states. Just this past week, Amazon terminated its whole Illinois affiliate program, where local websites link to Amazon, in order to evade a recently passed Illinois law that required online retailers market in the state to pay sales taxes if they had people in the state marketing on their behalf.

Losses of state and local sales tax revenue from online retailers evading the tax will total an estimated $11.4 billion by 2012, according to this University of Tennessee study. That adds up to hundreds of thousands of teachers that states will need to fire, community health clinics closed across the nation, and cutbacks in public safety in all our communities.

Why Won't Amazon Compete on a Level Playing Field: I live in New York which passed a similar law, and Amazon chose not to terminate its affiliate program here, so I pay sales tax on Amazon purchases. But that hasn't stopped me and other state residents from using Amazon, since even with sales tax, it often provides better value than competitors locally.

But why should Amazon ever get the unfair competitive advantage of not having to collect sales taxes? A basic principle of tax policy is that the same product should be taxed the same whoever sells it. Customers should never be making decisions based on evading taxes; otherwise, less efficient retail strategies may be adopted based on the tax system rather than on the inherent value of the service.

Online Tax Evasion Shifts Tax Burden onto Low-Income Families: And it's just economically unfair to make it more expensive to shop at a local store than to shop online. Online shoppers at places like Amazon are wealthier than people who only shop locally. So if online shoppers aren't paying the sales taxes needed for local schools and hospitals, that means the tax burden shifts from wealthier residents to poorer residents. Most people don't realize lower-income families pay a higher percentage of their income in state and local taxes than the wealthy, so the rise of online shopping and tax evasion is just making a bad situation worse.

Excuses for Online Sales Tax Loophole aren't Persuasive: And the following are just a few quick rebuttals to Amazon and other online retailer arguments as to why they deserve their loophole. I'm going to tap a report by Michael Mazerov at the Center on Budget and Policy Priorities, who has been birddogging Amazon for years on this issue, for many of these arguments:
  • Myth: Online Retailers Don't Benefit from Sales Taxes: First, Amazon contracts with delivery trucks using roads paid with tax dollars and their users benefit from state investments in broadband expansion in states across the country. Second, the sales tax isn't paid by Amazon; it's paid by its customers, who live and benefit from the wide range of services paid for with local and state tax dollars.
  • Myth: Collecting taxes from multiple states is too complicated: In a database-driven world, which Amazon and online retailers specialize in, matching different tax rates to different customers is just not very challenging. And since Amazon already collects sales taxes on behalf of companies like Target, who have a physical presence in most states and are obligated to collect all sales taxes, it actually has the infrastructure in place. In fact, it calculates and collects sales tax in some states on behalf of approximately 5,000 independent merchants that sell items on its website, despite its public complaints of how tough it would be to collect from its own customers.
  • Myth: Tax Avoidance is not a Big Part of Amazon's Strategy: The reality is that Amazon has created multiple corporate subsidiaries to try to evade state taxes. For example, Amazon subsidiary A-9, based in California, is responsible for the ongoing refinement of the search engine customers use to find items on Amazon's website -- obviously a key asset for a company that sells 24 million different products - yet Amazon doesn't pay sales tax in that state. It has inventory warehouses in Arizona, Indiana, Nevada, Pennsylvania, Texas, and Virginia structured as separate corporations, so that Amazon ships its own goods using its own warehouses in those states, yet claims it has no physical presence.
And then there are just the gross political deals, such as the one currently being proposed in South Carolina, where Amazon will build its own warehouse in that state, yet will receive a special tax break from the state explicitly allowing it to evade taxes. The state Chamber of Commerce and conservative groups are condemning this $40 million giveaway to Amazon as a grossly unfair deal for the company.

Need a Federal Solution: Ultimately, even the laws like New York's and Illinois's will only address part of the problem of online retailing. What's needed is a federal law requiring all retailers selling goods in any state to collect and remit sales taxes to the home state of each customer. A Main Street Fairness Act has been introduced repeatedly over many years, but is now needed even more desperately by state governments facing massive deficits.

Crossposted from TechProgress

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