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Online Sales Tax Exemption Pressured By State Action

...for past taxes in exchange for an agreement to collect sales tax going forward. As a result of the multi-tax agreement, Amazon is under pressure to start collecting sales taxes on products sold on its site by third-party merchants.

States have been waiting for the Supreme Court to revisit the 1992 Quill ruling, which exempted merchants without a physical presence in the state from collecting sales tax, or for the federal government to clarify the matter with new laws. But the old ruling stands, no bills in Congress have made any headway, and the tax revenue lost to online sales continues to grow. So now the issue is playing out one state at a time.

The unresolved question: Who will be responsible for collecting and remitting the taxes when someone buys something from a third-party seller on Amazon.com? Is that Amazon’s job or the merchant’s job or some combination? Experts disagree, and states are using different tactics to collect. South Carolina is going after Amazon directly in court, saying it owes $12.5 million in back taxes, penalties and interest from third-party sales. Amazon has vowed to fight the case. Minnesota, home to brick-and-mortar competitors Target Corp. and Best Buy Co., in June enacted the country’s first law requiring companies like Amazon and EBay Inc. to collect sales taxes on goods sold by third-party sellers.

For most of the past two decades, Amazon.com staunchly resisted collecting any sales tax. However, as it opened distribution centers across the country, it now collects sales tax on inventory it owns directly in all states that levy such taxes. But about half of its sales are goods owned by 2 million merchants posting products on its site, which include the likes of Guitar Center, Sweetwater, Sam Ash, and dozens of other m.i. retailers. Amazon leaves tax collection up to them—and many maintain that it’s not their responsibility.

Some merchants argue that Amazon should be required to handle taxes for sales on its marketplace. They contend that Amazon is like a traditional retailer while they’re just suppliers. They also say collecting sales tax is an unfair burden on small business because it would require them to file every month in multiple states and taxing districts that each have their own rates and peculiarities. But the merchants fear states would rather collect taxes from them because they’re easier targets than Amazon, which can afford a protracted legal fight.

However the drama plays out, all signs point to the eventual closing of long-standing loopholes that let customers buy stuff online without paying sales tax.

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