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Reweaving Tax Nets to Nab Online Shoppers

American shoppers owe sales taxes on online purchases whether Amazon and its friends assess them or not. States are trying various gambits to recoup those lost dollars.

State and local governments across the country have been struggling since the recession began to pay teachers, fund health initiatives, staff police and fire departments and keep social services running. With the newest jobs report out Friday — unemployment nationally has ticked back up to 9.8 percent — the epidemic budget woes aren't likely to end soon.

All of this means state officials will be cringing this holiday season at the thought that you may shop online. Sure, if you buy a lot for Christmas, it helps feed the economy. But if you're getting most of it from Amazon, your local schools and services probably lose out.

The arrival of holiday shopping season renews an annual and bitter debate around an old sales tax law — one created in the age of mail-order catalogues, not Internet commerce — that governments fret robs them of essential revenue. Internet retailers like Amazon that don't have a physical presence (a store, a warehouse, a headquarters) in your state aren't required to collect the local sales tax due on everything you buy online. You're still responsible for paying it. But most people don't know that, and hardly anybody does.

"There's no question in the aggregate it's billions of dollars a year," said Michael Mazerov, a senior fellow with the Center on Budget and Policy Priorities. "How many billions we don't know."

Mazerov is one of a handful of people — among some lawyers, accountants and researchers who've been obsessed with this for years — who actually calculate their own online sales tax and then hand it over with their annual state income tax filing. Teaching more people that they have this responsibility probably won't recoup those billions, which is why states have been trying to figure out how to get Amazon and others to collect it for them — just as the cashier does at the local Target or Best Buy.

Online retailers, with Amazon at the helm, have resisted the idea. They gain a competitive advantage by not charging the tax (admit it: you try to make all big electronics purchases online). And they say it would be too burdensome to administer in thousands of jurisdictions.

A sales tax — paid by the consumer — helps fund local services that benefit the consumer. But a 1992 Supreme Court decision reaffirmed that what matters is the location of the seller. Amazon is physically based in Washington state. So it doesn't have to collect the sales tax if you live in Virginia, even though that tax goes to fund services for you in Virginia. Target, on the other hand, does have to collect online sales tax in Virginia, because it also has store locations there.

That 1992 decision came out of a case brought by states against a mail-order catalogue company.

THE IDEA LOBBYMiller-McCune's Washington correspondent Emily Badger follows the ideas informing, explaining and influencing government, from the local think tank circuit to academic research that shapes D.C. policy from afar.

Miller-McCune's Washington correspondent Emily Badger follows the ideas informing, explaining and influencing government, from the local think tank circuit to academic research that shapes D.C. policy from afar.

"We did make the argument that there was already home shopping," said Mazerov, who conducted research for the case and has been immersed in the issue ever since. "But of course, we had no inkling what the Internet was going to be."

Now states are ratcheting up the decades-old dispute as they confront two converging trends: Governments are increasingly strapped for cash, and the rest of us are buying more and more stuff online.

"Certainly from the states' standpoint, that's very true," Mazerov said of the growing urgency to address the problem. "But it doesn't appear to be lighting much of a fire under Congress. From the states' standpoint, their finances are hurting, and they would much prefer to be raising revenue by effectively collecting a tax already on the books than enacting new ones."

While the explosion of e-commerce has made the problem worse for states, today's more sophisticated computer programs would arguably make it easier for companies to collect the tax. But neither of those facts, Mazerov says, make for good legal arguments. And so absent an unlikely new Supreme Court decision, or any action in Congress, he's advocating states tackle the issue one by one.

New York two years ago passed a clever "Amazon law" other states may mimic, and Colorado this year has been charting a different course. The New York law, which has withstood a round of legal challenges, targets online companies that earn revenue through local affiliate programs like "Amazon associates." A personal blog, for example, that participates in the associate program gets a commission for funneling traffic and purchases to Amazon. And this arrangement with local outlets is enough to establish that Amazon has a physical presence in the state, according to New York.

Colorado, meanwhile, has passed a sales use tax-reporting law. It requires companies like Amazon to alert customers with every purchase of their sales tax obligation to the state — and to mail them a year-end accounting of their purchases with the warning that the same information will be sent straight to the state, too.

"It would open the possibility that if enough states start doing this, and there's enough of an outcry form the industry," Mazerov said, "then maybe this will encourage Congress to come in with a uniform solution."