The Amazon Tax, Coming Soon to Your State

by Christian Schneider

Have you been holding off purchasing that Pee-Wee’s Big Adventure DVD? Have you found yourself insufficiently depressed and looking to get your hands on a copy of Ethan Frome to quell your happiness? Are your kids clamoring for a CD of Nirvana songs sung as lullabies?

Your best bet would be to get to soon — before your state starts subjecting the online giant to sales taxes.

Thanks to a 1992 Supreme Court Opinion (Quill Corporation v. North Dakota), online retailers aren’t required to collect sales taxes in any state where the retailer doesn’t have a physical presence. The Court ruled that it isn’t incumbent on individual stores to know the extensive mélange of sales-tax rates and exemptions around the country.

Yet as Amazon’s sales and product offerings increase, it has begun to erode the sales-tax bases of states around the country. (My intern reports to me that she actually buys some rare kind of flour on Amazon — yes, she’s one of those people. And if you guessed she also doesn’t own a television, you win a prize.)

Amazon’s annual growth has exceeded 15 percent in each of last seven years. Meanwhile, growth of sales collections paid by individuals through the line on their individual income-tax forms has been modest and erratic. In Wisconsin, sales taxes collected on out-of-state purchases actually declined between 2009 and 2010, from $2.1 million to $2 million (or about .05 percent of total sales-tax collections), despite online sales comprising a larger market share of purchases. (In Wisconsin, taxpayers are supposed to voluntarily report their out-of-state purchases on their tax forms, so it is in practice an optional tax — the only people that really pay it are Department of Revenue employees.)

Naturally, brick-and-mortar retailers that conduct business online are crying foul at this special “exemption” Amazon enjoys. Retailers such as Best Buy and Wal-Mart are leading a movement in numerous states to apply taxes to Amazon’s sales, laughably calling it the “Main Street Fairness Act.” California and Illinois have already passed laws meant to go after Amazon more aggressively. Texas is currently negotiating a deal with Amazon that would allow the retailer to avoid sales taxes in exchange for Amazon creating more jobs and investing more heavily in the state (a deal argued against in these very pages by Bill Peacock of the Texas Public Policy Foundation).

The issue presents a bit of a quandary for Republicans. Taxing Amazon is, by definition, a tax increase. It will increase the cost of, for instance, this 32-ounce jug of wolf urine for sale on the site. Higher prices continue to be the sand in the gears of a robust economy, and the higher taxes collected will allow governments to sustain bloated and outdated programs.

But the tax also plays well parochially, as it provides a more level playing field for state retailers, to whom politicians are more indebted. In South Carolina, a recent law exempting Amazon from sales taxes has expired, and luminous GOP governor Nikki Haley isn’t sure whether she’ll try to extend it. “Economic development and job creation are two of her highest responsibilities and priorities, and while the governor wants to make sure we keep promises made to companies, she also wants to make sure we are being fair to the companies that we already have in this state,” Haley’s spokesman told the New York Times in March.

In the meantime, Amazon will continue to be blamed for the decline of local retailers across the country. Due to consumers’ insatiable thirst to buy the Carrie Prejean autobiography in its Kindle form, cute little You’ve Got Mail–style bookstores are being boarded up around the country. Undoubtedly, some author will write a book about how Amazon is ruining the literary business in America — then see used copies of the book sold at deep discounts on

— Christian Schneider is a senior fellow at the Wisconsin Policy Research Institute.