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Time for a US ‘Amazon Tax’ or EU VAT on e-commerce?


Time for a US ‘Amazon Tax’ or EU VAT on e-commerce?

As the US faces up to a growing annual deficit of over $1 trillion, and a debt pile in excess of $16 trillion, the attractions of properly taxing e-commerce trade across the states is becoming all too alluring. Often called an ‘Amazon Tax’, in acknowledgement of the level of intra-state sales the huge online firm makes, it could mimic the European Union’s distance selling regime for EU e-commerce.

No taxes between the states – it’s in the Constitution and Nexus rules

The maxim that states could not charge taxes on companies resident in other sates doing business with their consumers goes back to the Constitution. It was introduced to stop States on the coast from charging high levies for imports bound for the land-locked States.

This has been since been refined to the introduction of the a ‘nexus’ rule, which is similar to Europe’s and the OECD’s ‘permanent establishment’ rule. This says that if an out-of-state company has a site or employees (or some physical presence) in the other state, then it can be taxed by the target state.

E-commerce explosion creates unfair, untaxed competition

As a result of the above tax evolution, consumers in state are charged US sales tax on any goods they buy online from a retailer located in their state, too. However, via the internet, out-of-state retailers are free to sell to the same consumers without charging or collecting sales tax. This gives them a significant pricing advantage – on average 10% - over their competitors, and denies the home state much-needed revenues.

It is a complex issue since US sales taxes can be levied at the City and State levels. There are approximately 900 taxing jurisdictions in the US, which means over 900 compliance regimes to follow.

States launch Amazon Taxes on e-commerce

Rather than wait for a Federal solution to this, many US states are already progressing with introducing their own taxes on out-of-state internet retailers. The biggest state (by size of economy) introduced such as tax in 2012. It was estimated at the time that this would bring in over $200 million into the state coffers from over 200 out of state e-retailers.

Other states with similar taxes passed or pending include: New Jersey, Virginia; Connecticut Massachusetts; Nevada and Tennessee.

Will Congress Act and follow EU

The risks here are that all the states will go in different way. Some already have. This creates further uncertainty and complexity for trade, and raises the potential for double taxation.

Counter-intuitively, Amazon is in favour of introducing a sales tax. It is constantly in the public gaze for being seen as a sales tax avoider, and having to negotiate settlements on a state-by-state level. This includes the promise to build local warehousing and create in-state jobs.

One model it could look at is the EU’s distance selling VAT regime. This enables companies to charge VAT at the appropriate country rate (based on the address of the buyer), and file monthly or quarterly returns to declare and pay the VAT. It could be simpler – by only having one filing for all the 27 EU member states, and this may come within five years. It already exists for some electronically delivered services.

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VP Global Indirect Tax
Richard Asquith
VP Global Indirect Tax Richard Asquith
Richard Asquith is VP Global Indirect Tax at Avalara, helping businesses understand their compliance obligations as they grow globally. He is part of the European leadership team which this year won International Tax Review's Tax Technology Firm of the Year. Richard qualified as an accountant with KPMG in the UK, and went on to work in Hungary, Russia and France with EY.