Buying something online and avoiding the sales tax counts as one of life's little guilty pleasures.
But an increasing number of states have determined that they can no longer afford that indulgence, and Minnesota may join them in trying to collect sales taxes from online merchants like Amazon.com and Overstock.com.
It's not clear whether these efforts will, in the short run, mean more money for cash-strapped state coffers. In fact, it could reduce the income of website owners who direct traffic to online merchants. Still, it would mark an important first step in establishing a more level playing field for both online and bricks-and-mortar merchants.
Currently, a 1992 Supreme Court ruling says retailers have to collect sales taxes only in states where they have a physical presence. The ruling, handed down before most of us could imagine a commercial Internet, amounts to a built-in price advantage for many online merchants, one Congress has been unwilling or unable to address.
So, states are increasingly taking things into their own hands by rewriting the definition of "nexus," or physical presence.
A bill before the Minnesota Senate, for example, would force any online retailer who has affiliates in the state to collect state sales tax on taxable purchases made by Minnesota residents.
But turning up the heat on online giant Amazon likely means singeing tiny Web entrepreneurs such as Connie Berg of Northfield.
Berg's FlamingoWorld.com is home to a dizzying array of coupons and special deals with up to 5,000 advertisers, including Amazon. Berg earns a commission if someone clicks on one of those coupons and buys something from one of her advertisers.
Amazon, which did not respond to requests for an interview Monday, has called efforts to tax sales that originate through affiliates unconstitutional. The Seattle-based retailer has retaliated by ending affiliate relationships in Illinois and other states that have adopted measures similar to the one being considered in Minnesota.
Berg told a Senate committee earlier this month that she fears the same thing could happen to her. "If out-of-state retailers believe advertising with me will subject them to collecting taxes, they will drop me," she said. Berg could not be reached for comment Monday.
The Performance Marketing Association (PMA), a California-based trade group, says about 4,000 affiliate marketers in Minnesota earned $290 million in advertising revenue in 2009 and paid $20 million in state income taxes. If Amazon or other online retailers drop them, "the state will gain zero dollars in new sales tax revenue, and only hurt local Minnesota businesses who earn a living from advertising," said Rebecca Madigan, executive director of the PMA.
This isn't the first time this measure has come before Minnesota lawmakers. Sue Zumberge, general manager of Common Good Books in St. Paul, was one of only two people who testified in support of a similar proposal in 2009. The bill's support appears broader this time around. Gov. Mark Dayton has proposed such a measure as a way to help close the budget deficit.
The Senate bill was authored by Taxes Committee Chairwoman Julianne Ortman, a Republican, and it has won the support of the Minnesota Business Partnership, the Metro Independent Business Alliance, Target and Best Buy.
"People seem to understand that if we're not going to raise taxes, then we need to close the loopholes on taxes that we already have," Zumberge said.
Amazon and others have attempted to frame this as a new tax on consumers, but that's misleading. Laws in Minnesota and other states currently require taxpayers to self-report online and catalog purchases that would otherwise be subject to a sales tax. When was the last time you did?
It's unfortunate that Amazon's response is to punish the people who have played a role in its success. The ideal solution would be for Congress to act or the Supreme Court to revisit the matter. That's more likely to happen if states force the issue by acting first.
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