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Should All Amazon Shoppers Pay Sales Tax?

This article was written by in Consumer. 40 comments.


I almost participated in a boycott of Amazon.com. This was almost a decade ago when Amazon filed for a patent for its 1-Click ordering process. The patent was struck down in 2007 but I didn’t notice. In the face of Amazon’s low prices and, in my state, exemption from sales tax, my convictions didn’t stand a chance.

Today, Amazon is still my retailer of choice. In almost all cases, anything I could buy elsewhere costs less on Amazon if it is available. I decided last year to begin paying the annual $79 fee for Amazon Prime which provides me with free two-day shipping for almost all products and one-day shipping for $3.99.

I have also added the Amazon application to my new cell phone. Now when I’m shopping without advance preparation, I can scan the UPC bar code and view the product information, including price, specifications, and reviews, if Amazon sells the same item. Often, if the price is lower and I can wait another day or two before using the product, I opt to save money and buy from Amazon. I can do this using the formerly-avoided 1-Click ordering from my phone while I am in the store offering the same product for a higher price.

Part of the appeal is that in New Jersey, the state in which I live and the shipping destination for most of the products I buy, I do not need to pay sales tax on internet-based purchases from Amazon. Most states do not require sales tax if the company does not have a retail presence in the state. Amazon in New Jersey falls into that category. If you live in New Jersey or in 44 other states, you do not have to pay sales tax when you purchase and receive items from Amazon. New York shoppers once received the same benefit, but the state, in need of money, has at least temporarily begun requiring sales tax payments.

If you live in Alaska, Delaware, Montana, New Hampshire, or Oregon, Amazon’s practices should not matter because you would not pay sales tax regardless of whether the company has a retail presence.

Theoretically, in states that do require sales tax, you are supposed to pay a “use tax” when you file your state tax return to cover any purchases for which you did not pay sales tax to your state. This would include out-of-state purchases as well as online shopping.

This seems, like the patent filing, to be a way for Amazon to slip through the cracks of the law in order to hold an unfair advantage over competing retailers. Even Target.com, operated by Amazon, charges sales tax in most states. The two sides of the argument are succinct:

  • If Amazon does not have a retail presence — physical, brick-and-mortar offices for the retail arm of the company — in any state, the law says it does not need to pay sales tax in that state.
  • Even if Amazon doesn’t have a retail presence in a state, it most likely has offices for one of its many subsidiaries in that state. Those subsidiaries require public services like police and fire protection, and should therefore pay taxes to support those services.

Amazon is getting around the sales tax requirement by compartmentalizing every aspect of its business into subsidiaries. Almost all large companies do the same thing in order to benefit from the most business-friendly laws, including those pertaining to taxes.

Here is the real problem, however. Online commerce has existed for over a decade and there still hasn’t been any great progress in determining how best to govern that activity. Until there are more uniform rules, Amazon will do whatever it can to avoid paying taxes, I will shop at Amazon to avoid paying taxes (although it is often the lowest-priced competitor anyway), and out-of-state friends will continue to ship their packages directly to my address to avoid paying taxes.

Should all Amazon shoppers pay sales tax? Money being spent on purchases from Amazon is money that is not being spent in local stores. Those states with sales tax laws are losing out on income, income that is much needed in a recession and when states are having budgetary shortfalls. These shortfalls are recovered through increased income taxes, property taxes, and perhaps roadway tolls, with a larger burden on individual taxpayers. But yet, tax-exempt purchases could be keeping prices down, encouraging spending and some level of economic growth.

Do you pay taxes for your Amazon purchases? If you have never paid sales taxes for products you buy from Amazon but your state’s law changed to require you to pay sales tax, would your behavior change? I do not think the addition of a sales tax on Amazon purchases in New Jersey would be enough to encourage me to buy more products in brick-and-mortar locations. My only considerations and total price and convenience.

Note: This article was updated after it was published to remove an incorrect statement about how retailers collect and pay sales tax.
Sorry, Shoppers, but Why Can’t Amazon Collect More Tax?, Randall Stross, New York Times, December 26, 2009

Published or updated December 28, 2009. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.

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About the author

Luke Landes, also known as Flexo, is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about him and follow Luke Landes on Twitter. View all articles by .

{ 20 comments… read them below or add one }

avatar Investor Junkie

Don’t worry give it time eventually ALL online retailers will have to pay state tax in some fashion. OR worse the VAT tax that’s discussed. The days of no tax is coming to an end. I also live in NY. Ugh. I’m not sure why Amazon would bother to collect even though other retailers like Newegg do not. How come the states don’t try to collect on regular purchases (offline) out of state but target online? Answer: because it’s easy to track. I’m surprised the states don’t go through the credit card companies to find out who’s purchasing what and from what companies.

I believe people will resort to other means to avoid paying the taxes. Paying 8-10% can add up with big purchases.

When will our government learn increases in taxes do the EXACTLY REVERSE in what they intend to?

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avatar Tom Murin

“The full tax sales bill to states are paid half by the retailer and half by the customer.” This is not correct – there is no hidden component to state sales tax. The merchant collects the full tax and remits it to the state. I believe you are confusing Social Security tax which is paid by both the employer and employee.

Don’t forget that sales tax does not apply to all items. For example, clothing in NJ (my home state as well) is exempt. Collecting sales tax for multiple jurisdictions is not easy and an entity that does not have a presence in a particular state is not under that state’s jurisdiction. This is important – if there was an obligation to collect the taxes – there are rules for remitting the $$$ to the particular state and penalties for not doing so. If there is no jurisdiction then there is no proper mechanism for enforcement. Only a federal tax would be workable, I think. This opens up a big can of worms.

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avatar Investor Junkie

“Only a federal tax would be workable, I think. This opens up a big can of worms.”

You are referring to a VAT and it has been recently discussed by our government. I’m all for a VAT, only IF we go with a flat income tax. Otherwise we are taxed out the yin/yang. When discussing VAT there was no mention of changing our progressive tax code.

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avatar Apex

Nearly every country that has instituted a VAT has altered their income tax system to make it MORE progressive. The reason for this is that the VAT is considered to be a regressive form of taxation. Everyone pays the VAT regardless of income level and the poor pay a much higher percent of their income because they need to spend much more of their money on the necessities.

Thus to compensate for this the income tax is made more progressive.

If the VAT is instituted in the U.S. it is likely to come with a decrease in income tax rates at the lower levels and leaving the upper level brackets in place unchanged. This is what will make it palatable to the masses.

The GOP has been arguing for their national sales tax for a decade now. They just might get it. But not at all how they said they wanted it. They should have keep their mouths shut. The idea that we were ever going to abolish the income tax and replace it with a sales or VAT tax was niave at best.

15-20 years from now I suspect we will have both a VAT or national sales tax and a more progressive income tax.

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avatar juggler314

I think you are also wrong about remitting sales tax. It’s not that *you* as a resident of NJ don’t have to pay sales tax on items bought outside the state. It’s just that amazon isn’t required to collect it. I just checked and yes the NJ 1040 has a line for use tax. And the instructions specifically say you are liable for it.

If you want to lie to the state that’s fine. You almost definitely wont get caught, but should you ever be audited…they may make an issue of it. And in particular…since you’ve now publicly stated you don’t pay your use tax on purpose – it’s much worse, it could have been an oversight, but now you have basically admitted to fraud.

It’s probably not a good idea to advise other folks to do that as well…

I’m not going to check all the states, but I find it hard to believe there are many that don’t require you to report out of state taxable purchases.

And the issue of how to deal with the many, many, many tax jurisdictions in this country has been debunked already. There are already large organizations that collect tax nationwide (in particular the USPS collects taxes in every jurisdiction and given it’s a government agency could easily pass that info on). I mean it’s the 21st century, we have computers, a small table containing all the possible taxes is not really that difficult. Nor is remitting the taxes. You setup a GL code for each states tax, keep it all in a tax to be paid account, voila.

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avatar Investor Junkie

“And the instructions specifically say you are liable for it.”

Ah yes one of the problems running a financial web site. Disclosing too much can be financially hazardous to your wealth!

Don’t think the government can’t use what you say on the web? Think again as it already has happened..

http://online.wsj.com/article/SB125132627009861985.html

I would watch what you say on the Internets. This not only applies to Flexo but this applies to anyone.

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avatar Chris

I live in Virginia now and received that unpleasant surprise when I did my state taxes. I happen to keep records of all my purchases so I could go back and figure out how much I owed. I was pretty pissed though because I was doing the same thing, thinking I’m saving money by shopping at certain online sites. I would rather everyone just collect it through their websites instead of having to do it ourselves.

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avatar Ein

“The full tax sales bill to states are paid half by the retailer and half by the customer. When you pay $0.70 in sales tax for a $9.99 DVD, the store pays $0.70 cents, too.”

I’m not sure if it’s different in different states, but I’ve never heard of this. If a retailer sells $9.99 of stuff and owes $0.70, the retailer pays the $0.70 to the state, but it’s covered by the $0.70 he should’ve collected from the customer. The retailer is not paying sales tax out of his own pocket and the state doesn’t get $1.40. Additionally, the retailer would not have paid sales tax on the items when he purchased them from the supplier for resale (at least in the states I’m familiar with).

I’m an accountant, and admittedly only started being involved with the filing of sales tax earlier this year, but I believe this article is wrong on this point.

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avatar Dan

We should pay the tax when we purchase the item.

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avatar LeanLifeCoach

We should all be proud to have the opportunity to live in this country AND pay taxes. The bigger question is how our taxes are being used.

There should be parity in tax laws. (I can’t believe I wrote that!) In the end, tax rates have never factored into my purchase decisions, quality of service and support after the sale play a much bigger role.

Even if Amazon did have to collect state taxes they are likely to still be a lower cost alternative due to their Lean Management approach.

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avatar Dubary Brea

I already pay the taxes cause I live in NY state (specifically NYC)

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avatar David Campbell

Your other readers are correct in pointing out that the sales tax burden is solely the obligation of the consumer, not the merchant. In traditional retail outlets (a.k.a. “bricks-n-mortar” stores) the retailer collects the sales tax at the point of purchase, and remits those proceeds directly to the state.

Your readers are also correct in pointing out that even though the sales tax is not being collected by Internet merchants (without bricks-n-mortar presence in NJ) when you purchase, you are still obligated to report and remit equivalent use tax in NJ. These are not new taxes. Sales and Use Tax Laws were substantially adopted in New Jersey in 1966, before that in New Jersey you only paid sales tax on gasoline, tobacco products and alcoholic beverages.

Finally, congress is preparing to debate this exact subject! The Main Street Fairness Act will soon be introduced before congress to address this issue – that out-of-state or “Remote Sellers” should be required to collect and remit local sales tax.

The only reason they don’t right now is that in 1967 & 1992 the issue of Remote Sellers came before the US Supreme Court (in the context of mail order catalog merchants). In both opinions, the court agreed that remote sellers should collect and remit local sales taxes, but they also conceded that requiring remote sellers to keep track of 4,000+ local tax jurisdictions would be too difficult.

With contemporary companies like Amazon.com and services like iTunes, no one questions their technical ability to keep track of many millions of transactions per quarter. Further, with the successes of the Internet over the last 25 years, it is time to revisit how difficult it is for remote sellers to manage a mere 10,000+ local jurisdictions.

It is time to tell Internet merchants to start collecting and remitting local sales tax, just like the corner store has to. Stop pretending that the transaction is “tax-free” because Use tax is still due.

Your local sales tax should be collected & remitted for you by all merchants, so businesses and individuals don’t have to meticulously keep track of all out-of-state transactions.

R. David L. Campbell
Chief Executive
The Federal Tax Authority (http://Fed-Tax.net)

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avatar Investor Junkie

“It is time to tell Internet merchants to start collecting and remitting local sales tax, just like the corner store has to. Stop pretending that the transaction is “tax-free” because Use tax is still due.”

David,
This might be easy for the large companies like Amazon, but what about for the small online merchants?? Watch e-commerce implode, move at a snails pace and many small businesses go under if this becomes enforced. In addition, do forget about prices overall will go higher because of the additional fees businesses must perform to track sales tax. Once again the small business owner will get screwed.

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avatar Evan

I have been reading a lot about this subject on main stream sites, most are which liberal in nature, and they always seem to hint that it is Amazon’s duty to pay taxes. I refuse to believe that though. Whenever this subject comes up I always think back to a quote by Judge Learned Hand (yup, that’s his real name):

“Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one’s taxes. Over and over again the Courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone
does it, rich and poor alike and all do right, for nobody owes any public duty to pay more than the law demands.”

If the States believe that Amazon should collect sales taxes, sue them! Win in Court and force them to collect taxes. Why haven’t all states done it yet? Cause they aren’t sure they’ll win…why won’t they win? Because the legality is unclear at best.

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avatar Tyler Karasewski

If you don’t think you pay enough in taxes, you’re free not to include deductions that you’re allowed on your income taxes. Go ahead and claim zero exemptions and deductions so you can better finance the government in this tough economy. Alternatively, drive faster, fund the state in speeding ticket fines.

Personally, I feel like I pay plenty already, I’m not going out of my way to encourage any more taxes on myself.

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avatar John DeFlumeri Jr

The total price, including shipping and tax is what I base my purchases on.

John DeFlumeri Jr

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avatar Financial Samurai

Gotta say, because I absolutely ABHOR paying any taxes, I simply don’t buy anything, or wait until I’m in a state with no sales tax, or lower sales tax to even consider spending anything.

Amazon should either charge everybody a sales tax, or nobody a sales tax. Keep it consistent and fair.

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avatar Alex

So many taxes.
We in Australia are just as confused with the number of different types of taxes to be paid. Although I agree with Financial Samurai I know that certain taxes are almost inevitable.
They keep politicians employed!

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avatar Jacxx

Maybe the brick and morter stores should quit complaining about how they are losing sales just because of taxes. I don’t shop online just because of taxes (collected or not) – I shop online because I am from a rural state that doesn’t have any selections and charges huge markups because they are the only business in town. How would a tax like this be enforced anyhow? In my state – each city has a different tax rate depending upon what local taxes were passed by the city council on top of the state sales tax rate. It could be the standard state rate or higher. I happen to live in the country. If I buy items in town – I get charged their higher sales tax rate but if I can have them delivered – I get charged the lesser state sales tax rate (if I ask for it and typically only for building supplies). When Amazon is trying to assess how much to charge me – how are they going to determine it? Based off of my zip code of a different city? I try to shop locally however even national department stores have only a meager selection of items. When there isn’t any competition, selection, or a availability of items – I’m going to shop online. Taxes or no taxes.

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avatar Jerry Kindall

We live in Seattle and therefore rarely order from Amazon, as the sales tax makes such orders ~10% more expensive than out-of-state competitors. (An exception is food — no sales tax on that.) If those competitors had to charge Washington state sales tax, we would probably order from Amazon more often.

I know some locals who do order from Amazon all the time and I’m always like, wait, why would you do that?

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