Some cities missing out on Amazon sales tax revenue according to ITEP report
- April 2, 2018 | Gail Cole
Ecommerce giant Amazon.com has been collecting sales tax in all states that have a sales tax since April 2017, at least on sales of its own products. In fact, it’s been collecting in many states since well before then. However, the company doesn’t collect tax on its third-party sales in most states. And according to a new report by the Institute on Taxation and Economic Policy (ITEP), Amazon isn’t collecting the same local taxes that brick-and-mortar businesses collect in some jurisdictions — although it is collecting the taxes it’s required to collect.
Amazon says it collects all sales and use taxes as required by law (New York Times), and the facts seem to corroborate that. According to the ITEP report, Amazon isn’t cheating local governments. It’s simply taking advantage of their outdated tax laws: tax policy gaps caused by sellers use tax, origin sourcing, and the lack of a central tax authority.
The general rule of thumb with sales tax is that a state can only require a business that has a physical presence in it to collect and remit. This physical presence limitation takes a bite out of state and local sales tax revenue — and untaxed sales by out-of-state sellers have grown exponentially with the rise of ecommerce.
Consequently, many states are pushing against the physical presence limitation by broadening the definition of nexus to include relationships with in-state affiliates (affiliate nexus), referrals from in-state businesses (click-through nexus), economic activity (economic nexus), and more. They’re seeing some success: The Supreme Court of the United States will soon reconsider physical presence nexus in South Dakota v. Wayfair, Inc., a case regarding South Dakota’s economic nexus law (learn more about what that could mean for businesses here).
But many states remain unable to effectively tax sales by remote sellers. And according to ITEP, many localities are in the same boat. In fact, some localities aren’t collecting all applicable local taxes on sales by businesses that do have a physical location in the state, if not the locality itself.
States where out-of-state sellers may not collect local sales tax
The ITEP report posits that Amazon isn’t collecting some or all local sales and use taxes in approximately seven states: Alabama, Alaska, Idaho, Iowa, Mississippi, New Mexico, and Pennsylvania. Although Alaska has no general state sales tax, it does allow localities to levy local sales tax.
The state created the inequity in Alabama. Like many other internet sellers, Amazon benefits from Alabama’s Simplified Seller Use Tax Remittance Act, which permits it to collect a special flat 8 percent tax rate on all Alabama sales. This flat tax was designed to encourage non-collecting out-of-state sellers to voluntarily collect and remit tax in Alabama by making compliance less of a hassle: Instead of collecting different rates in different jurisdictions, out-of-state sellers charge one rate for all sales in the state.
It’s been effective. To date, approximately 200 out-of-state companies have registered to collect Alabama’s simplified seller use tax. That’s a win for the state, which collects the 4 percent state sales tax on these sales, and a win for localities, which receive 4 percent in local taxes.
Nonetheless, localities like Birmingham and Elberta that impose higher local taxes may feel the loss of the extra revenue. In addition, brick-and-mortar businesses may feel they’re at a competitive disadvantage to remote retailers that charge less in tax. In Birmingham, local retailers have to charge 10 percent: 4% state tax, 4% city tax, 1% county tax, and 1% special tax. In Elberta, they have to charge 11+ percent: 4% state tax, 4% city tax, 3% county tax, and in some areas a special local tax. Given the choice, customers may prefer to shop online from a remote retailer and pay the 8 percent.
Sales tax vs. sellers use tax: Idaho, Iowa, and Mississippi
Although commonly referred to as sales tax, the tax that applies to sales by out-of-state sellers is actually sellers use tax (thus the Alabama Simplified Sellers Use Tax). Learn more about sales tax and sellers use tax here.
The general rate of sellers use tax is the same as the general rate of sales tax in all states. However, sometimes the local sellers use tax rate differs from the local sales tax rate. And in some states, including Idaho, Iowa, and Mississippi, certain localities may not impose sellers use tax at all.
As explained in the ITEP report, “Localities in Idaho, Iowa, and Mississippi lack their own local use taxes and therefore the company is not collecting any local tax amount.”
Origin sourcing vs. destination sourcing: New Mexico and Pennsylvania
Most states use destination sourcing to determine the applicable sales tax rate. Under destination sourcing rules, the sale — and the sales tax rate — is based on the location where the consumer takes possession of the product purchased.
In catalog, internet, and phone sales, this is typically the delivery address. For example, a person living in Seattle would pay Washington’s 6.5 percent state tax plus Seattle’s 3.6 percent local tax on Amazon purchases delivered to their home.
However, in origin-sourcing states like New Mexico and Pennsylvania, the sale and the tax rate are based on the location of the seller (the origin of the sale) rather than the location of the consumer.
Amazon made an agreement with New Mexico to voluntarily collect sales and use tax in 2017. But because there are no Amazon fulfillment centers in New Mexico (and presuming Whole Foods Market doesn’t trigger nexus for Amazon), a person living in Albuquerque pays the state rate of 5.125 percent on Amazon shipments, but not Albuquerque’s 2.375 percent local tax.
The situation is a little different in Pennsylvania, where Amazon does have fulfillment centers. It collects the state rate only in Pennsylvania rather than state and local tax because it doesn’t have a physical presence in Philadelphia or Allegheny County, the only two areas that levy a local sales tax. Learn more about origin and destination sourcing here.
Localities vs. the state: Alaska
Amazon does collect local tax on some sales into Alaska, according to its About Tax page. But not all. To be clear, it isn’t required to collect local tax in localities where it doesn’t have nexus.
Although discussing local tax, ITEP highlights the fact that Alaska doesn’t have a statewide sales tax. Having no state tax authority with a “vested interest in the outcome of the push for e-retail sales tax collection,” it suggests, means “Alaska’s localities have been left without a coordinated effort, or a negotiator.” That may be so, but attempts to impose a statewide sales tax in Alaska have failed.
The crux of the ITEP report seems to be that states and localities with outdated sales and use tax laws should seriously consider updating them.
In fact, some already are. Economic nexus took effect in Mississippi on December 1, 2017. A marketplace facilitator law took effect in Pennsylvania on March 1, 2018, and as a result, Amazon is collecting tax on its third-party sales there as of April 1. Click-through nexus will take effect in Idaho on July 1, 2018.
However, none of the above address the fact that some localities don’t impose local sellers use tax. That would require action at the local level — and that sometimes occurs. Local jurisdictions in Kansas opted to impose local sellers use tax when the state joined the Streamlined Sales and Use Tax Agreement in 2005, because they accepted that they would collect no tax from remote online sellers without it. And residents of five cities in Missouri will soon have the opportunity to approve proposed sellers use taxes that would level the playing field between local and remote merchants.
In addition, some collection discrepancies may be addressed when the Supreme Court reconsiders the physical presence limitation in South Dakota v. Wayfair, Inc. (arguments will be heard April 17 and a decision is expected in late June). Many tax wonks believe the court will loosen the physical presence limitation to some extent.
But ITEP predicts the Supreme Court ruling, whatever it is, is unlikely to affect localities in Alabama, Alaska, Idaho, Iowa, Mississippi, New Mexico, Pennsylvania, or any other states that don’t receive local sales tax revenue from certain remote sellers. It urges state governments to remember localities when it comes to sales tax.
Understanding how various sales tax changes could impact your business is challenging. Avalara’s 2018 Thought Leadership Webinar Series provides sage advice from leading experts on sales tax compliance. The April 4 webinar will cover non-collecting seller use tax reporting laws, yet another route states are taking to end tax-free shopping. Learn more here.