Will You Soon be Paying Sales Tax at Amazon?

For years, online shoppers have enjoyed shirking sales tax for their purchases from websites like Amazon.com. Thanks to a few Supreme Court decisions, retailers that lacked a physical presence have been immune to sales tax. But a new piece of legislation in Congress could change all that, and possibly bring an end to tax-free shopping online.

The Main Street Fairness Act would  require retailers to collect sales tax on purchases wherever the consumer resides. This would seem to shift the physical presence requirement for taxation on to the purchaser, rather than the seller. Currently, sales tax on online goods is supposed to be reported by consumers on their state income tax returns, but very few actually report all their purchases. A study carried out by the University of Tennessee estimated the loss of revenue to states from unreported online sales tax at around $10.1 billion in 2011 and $11.3 billion in 2012 nationwide. In a time when state governments are particularly strapped for cash, that kind of money might be too hard to pass up.

Interestingly, some major retailers are pushing for changes to the way sales tax is collected. Wal-Mart, Best Buy, and Target have all lobbied for mandatory sales tax collection, since it could reduce the discrepancy between their prices and other online retailers. Amazon.com, for instance, can offer lower prices because they won’t be adding sales tax to the bill. Of course, Amazon has pushed back against sales tax legislation just as hard, having threatened to pull their operations out of states that challenge their immunity.

But requiring Amazon to collect sales tax wouldn’t normalize prices across the scope of online retailers. Unlike brick and mortar establishments that run online stores, Amazon has built its storage, distribution, and sales infrastructure to work solely online. Amazon prides itself on its efficency, and uses the low overhead costs to keep prices low. Physical stores means distribution systems and costs that Amazon just doesn’t have to worry about. From Business Week:

Analysts at Wells Fargo Securities (WFC) recently surveyed a range of products and found that even without factoring in sales tax, Amazon’s prices were, on average, 5 to 6 percent lower than Wal-Mart’s and 12 to 13 percent below Target’s.

Business week also notes that were the sales tax legislation to pass, Amazon might actually be able to improve its services. Without having to concern itself with avoiding sales tax, Amazon might expand its shipping system to more states, perhaps allowing for faster delivery times.

There’s also a psychological advantage to consider. Amazon has dominated the online marketplace for over a decade now, and even if the cost of sales tax increased their prices slightly, it might not drive away the consumers that consider them to be the go-to source for online shopping. That kind of advantage could take years of promotions on the part of other retailers to erode.

Of course, none of this will matter if the bill cannot survive the arduous U.S. legislative process. While the Main Street Fairness Act boasts some powerful supporters, namely Senator Dick Durbin (D-IL), it could be perceived as an additional tax which is not likely to play well with consumers. For now, it’s just an idea. But if you do a lot of online purchasing, its certainly something to keep an eye on.

(via Business Week)