Yesterday, Gov. Brian Sandoval announced that he had reached an agreement with Amazon that would allow the State of Nevada to begin collecting sales tax revenue on purchases made through the online retailer’s websites.
I’m sure that this announcement will spur a plethora of misinformed opinions about whether the governor is again raising taxes, so I thought it worthwhile to immediately clarify that no new tax liability would be created by this agreement. The Amazon agreement begins to address a long-standing collection issue; it does not impose a new tax.
The collection of sales taxes for online purchases has been a tricky issue since sales first began to take place over the internet. Technically, all states that impose a uniform sales & use tax, like Nevada, already tax these purchases through the use tax. Individuals in Nevada who make purchases over the internet are responsible for reporting these purchases to the Nevada Department of Taxation and remitting their “use” tax liability. The use tax rate is identical to the sales tax rate; the only difference is that the seller is responsible for remitting sales taxes whereas the buyer is responsible for remitting use taxes.
Of course, most online shoppers have routinely neglected their legal responsibility to remit use taxes for online purchases. This doesn’t mean that the tax liability did not exist for these purchases, but it’s been easy for shoppers to evade their tax liability because it’s cost-prohibitive for state tax departments to audit individuals based on their online purchase history. The result has been a pervasive noncompliance with the tax code and a leakage of tax revenues that are legally due to state and local governments.
As a result, several states have attempted, in recent years, to transfer the onus of tax collection from online purchasers to vendors-shifting from a use tax to a sales tax for these transactions. Court decisions have rendered this change challenging, however. In 1992, the U.S. Supreme Court declared that states could not force retailers to collect sales taxes if they did not have a physical “nexus” within the state in question. As the only legislative body with the power to regulate interstate commerce, said the Court, Congress alone could provide for a system of interstate sales tax collection.
A controversial law passed by the State of New York later defined marketing firms who advertise on websites like Amazon as part of Amazon’s physical “nexus,” which, claimed state policymakers, gave them authority to force Amazon and similar online retailers to collect and remit sales taxes. That law has been the subject of ongoing legal dispute over the past several years as Amazon and Overstock.com have sued the State of New York, claiming its law to be unconstitutional. North Carolina and Rhode Island have enacted similar statutes, prompting threats from Amazon that the retailer would not do business with any firms that have a physical presence in these states.
Colorado lawmakers took a different approach, when, in 2010, they passed a law requiring online retailers to notify purchasers from Colorado, as well as state tax authorities, of each individual’s use tax liability. The intent was to increase compliance with the state’s existing use tax laws. Last month, however, a U.S. District Court decision found that even this requirement placed undue restraints on interstate commerce and that an individual state lacked the authority to enact the law.
Amazon’s agreement with Sandoval, as well as the retailer’s apparent willingness to now support federal legislation allowing for interstate sales tax collection marks a watershed in the evolution of what’s become known as the “Amazon tax” debate.
Regardless, one should be careful not to confuse a change in whose responsibility it is to collect and remit the tax with the imposition of a new tax. If one disagrees with the tax liability that is assessed on online purchases, then that disagreement should be directed toward the current construction of the use tax. The liability already exists-it’s just been easy to ignore the law until now.