Howdy, my fellow finance nerds! It’s Penny again, and I’ve just embarked on yet another quest to understand this wacky U.S. tax code of ours. This week, I’ll be talking Internet taxation – and we’ll dive into the “Amazon Tax” in particular.

Ever heard of it? If you’re like me, the answer is probably no. And, like me, you’ve likely enjoyed using Amazon for years now, marveling at the low pricing but utterly failing to realize that you’ve escaped paying sales taxes during each and every one of your online checkouts.

The federal government doesn’t collect sales tax, so Amazon’s largely escaped the sales tax situation for years now. However, now that the economy’s in the toilet, many state lawmakers have begun rabidly digging for revenue-generating solutions. Amazon is one company on the chopping block, and eight states have enacted legislation compelling the ecommerce giant to start coughing up its fair share of government dues. More states are likely to join the movement, and the change will usher in a new (and way more expensive) era for online retailers and their customers.

Understanding the Amazon Tax

Apparently, I wasn’t the only one who didn’t quite “get” the Amazon Tax. Here’s a recent question from Tax Connections posted by a member who was equally confused:

 

Never fear – Tax Pro Debbie Tolbert to the rescue! Debbie works double duty as both owner and manager at Friends Doin’ Taxes, LLC in Lake Ozark, Missouri. Lordy, she must have her hands full! Here’s what Debbie had to say about the Amazon Tax:

I checked out her listed resource – along with a few of my own, of course – and found out quite a bit about Amazon’s tax debacle. I also discovered that Internet taxation in general is gaining a ridiculous amount of attention these days, and we’re likely to hear about it much more in the years ahead.

Amazon and Accountability for Internet Commerce

Eight states have officially enacted taxes for residents on their Amazon purchases. So far, only Kansas, Kentucky, New York, North Dakota, Texas, Washington, California, and Pennsylvania have taken the plunge. However, New Jersey, Virginia, Indiana, Nevada, Tennessee, and South Carolina aren’t far behind – these states have already introduced legislation to do the same, and their taxes are expected to roll out over the next two to three years. There’s a predetermined date set for each state.

Those in favor of the Amazon Tax maintain that it’s grossly unfair to force brick-and-mortar stores in a state to collect sales tax while simultaneously allowing Amazon to sell to those same state residents tax-free. That’s why Amazon’s feet are roasting in the proverbial fire right now – the company has flat refused to charge sales tax in states without laws compelling it to do so. Here’s what makes matters worse: in many of the tax-free states, Amazon even maintains warehouses and other business offices – meaning it’s not just operating online in these areas… the company also has a physical presence.

The only thing Amazon’s said about the matter is that it would support some kind of federal fix-it that would be both simple and fair, but the government didn’t give a hoot about what Amazon would support. Back in May of 2011, Congress enacted sweeping legislation that granted states the authority to tax their residents on out-of-state sales.

The Motley Fool recently published a great piece about Internet taxation, and in it, the author pointed out that Internet sales tax is a reality that’s coming – regardless of whether the online world is ready. There will be winners and losers across the board when Internet sales tax does eventually become a common practice. For instance, EBay will have a definite edge over Amazon since it is nothing more than a platform for sellers to make transactions on their own. EBay doesn’t hold any inventory, so it will have the ability to mitigate sales tax far more effectively than Amazon.

Plus, according to the Fool article, EBay has unique access to a possible loophole in the tax code. Since individuals sell their goods on the platform, they could fall under a special exemption – which may mean sales tax wouldn’t apply.

This all translates to a shift in the online retail dynamic – and we’ll see companies rise and fall as taxes are applied to ecommerce companies. Services like EBay and PayPal have definite advantages, but physical retailers such as Amazon may struggle markedly in the years ahead.

Conclusions

For you and me, all this may seem to mean nothing. But it does – even though it appears that Internet sales taxes would be a bad thing for us as consumers, it may end up being good. We’ll see companies lower prices and claw at one another to stay afloat by attracting our business. We’ll come up roses after state taxes regulate online commerce, and our wallets will be fuller as a result.

That’s it for me, my taxpaying friends! I hope you learned something today, and don’t forget to tune in next week for another round of ol’ Penny’s tax-loving adventures.

Making Cents Count,

Penny