Amazon’s Marketplace Business Isn’t a Tax Avoidance Scheme
August 16, 2017
President Trump on more than one occasion has accused Amazon of not paying taxes. The latest version came out this morning on Twitter. Most assume that he’s referring to whether the e-commerce company collects sales taxes. So, does Amazon collect sales taxes? The short answer is: Yes.
For brief background, the U.S. Supreme Court’s 1992 Quill decision ruled that retailers only have to collect sales taxes if they have a physical presence in the state. Most state sales tax laws are complex and use varying rules to define what’s taxable and what isn’t. Adding to the complexity, localities in many states also impose additional taxes on top of the state rate. There are currently more than 10,000 sales tax jurisdictions in the country. The Court recognized that these complexities would burden interstate commerce and that it should be up to Congress to give states the authority to require out-of-state businesses to comply with myriad sales tax rules.
Amazon has obviously grown substantially and has a much larger presence to facilitate faster shipping. As a result, it collects taxes on sales it makes in any state with a sales tax on the books.
However, news came out yesterday that South Carolina is seeking uncollected taxes from Amazon related to its marketplace sales in the state. Not only is Amazon a retailer, but it also makes its online platform available to other businesses to reach a larger consumer audience. On these sales, Amazon defers tax responsibilities to the third-party retailer. Is this what Trump’s tweet is referring to? It’s difficult to say. However, given the South Carolina news and comments last month by Secretary Mnuchin about Amazon’s handling of direct sales versus marketplace sales, it’s reasonable to guess that this is the point he’s discussing.
If it is, calling this tax avoidance or a “loophole” (as others have) is wrong, or at best misleading.
The debate over state sales tax collection authority and online sales is nearly two decades old. In that time, e-commerce has changed quite a bit. Unfortunately, with the exception of efforts by the Streamlined Sales and Use Tax Agreement member states, sales tax laws haven’t become any simpler. The issue has been before Congress for years, with some solutions calling for substantial—and much needed—sales tax simplification. These proposals have seen little movement.
There is an effort to enact a federal law to establish a framework for sales tax collection by e-retailers, trading sales tax collection authority for states with simplifications to state sales tax laws. However, such proposals have stalled in Congress in recent years. Frustrated by federal inaction, South Dakota passed a law ordering all e-retailers to collect (the state has no other large tax besides its sales tax, and their sales tax is not riddled with exemptions like other states’ sales taxes – it really does apply to every seller except e-retailers) and that will be heard this month by the South Dakota Supreme Court. It’s a direct challenge to Quill.
But even if Quill is overturned by Congress or reversed by the Court, marketplace sales are a tricky issue. It’s one thing to require a retailer to collect the sales tax. It’s another to redefine when a separate facilitator should take on the responsibility of a retailer.
Minnesota and Washington state have recently adopted laws aiming to require sales tax collections on sales facilitated by third parties. Whether they realize it or not, these marketplace laws will pass higher costs onto small businesses and consumers. Even if Amazon and eBay are capable of handling sales tax collections for marketplace sellers, those services aren’t free. Nor should they be, given the wide range of rules one needs to navigate in all 50 states, not to mention the localities in some states with the authority to make their own determinations of what to tax.
Whatever the Tweet meant, states should seek to simplify their sales tax administration. More often than not, this important point gets lost in the quest for revenue. Lowering compliance costs would benefit the economy and allow states to collect taxes more efficiently. To ensure that these simplification efforts are adequate, Congress is the right venue to find a solution. Otherwise, states and localities will continue to pursue a piecemeal approach that creates even more complexity. Minnesota, Washington, and South Carolina may think they have a solution, at least for Amazon’s entire business model. But enhancements in technology will continue and could very well blur the line between even more between retailers and facilitators. Allowing states to come up with any interpretation of this gray area would be problematic, leaving 50 different sets of lawmakers to try and hit a constantly moving target. If state sales laws were as simple as they probably should be, many of these concerns would go away.