Every Retailer Has Something to Gain From Amazon's Lawsuit over Collecting NY Sales Taxes

Implications: Amazon's lawsuit may be more about the viability of sales and use taxes to collect state revenue than about one e-commerce company collecting New York sales tax.  Here's why.

Analysis: Amazon is right to challenge the New York’s new law since it seeks to redefine the application of rule of physical presence for determining when remote sellers have to collect sales taxes.  Just what the merits of case are remains uncertain, but one thing should be clear, states will continue to look for ways to recover lost sales tax revenue from e-commerce and direct marketing companies.  

Depending on the research used, analysts think legislatures will have to raise tax rates from 0.9% to 1.7% to offset the erosion in sales and use taxes collected.  The problem is that could encourage even greater use of remote retailers by consumers, lowering sales tax receipts further.  However, the issue really isn’t about remote companies collecting and paying sales tax as it is the relevance of the sales tax system as an efficient and equitable method of revenue generation for state government.  


The fact is state sales taxes are regressive and penalize low income families.  Equally important, sales tax collection is inefficient and would become even more so if expanded to remote sellers. For instance, it is estimated that remote retailers would be responsible for administering more than 15,000 different tax rates and filling a menagerie of different tax forms.  But that could be the least expensive part of the collection process.  States have also failed to agree on basic simplifications of the taxing process including uniform definitions and simplified administrative procedures for compliance audits.  For those that point to technology as a solution, it is important to note that after years of development efforts, compliance software still hasn’t been perfected.  Given the lack of state agreement and changing scope, many feel such software will never be implemented.   That will only mean the cost of compliance for retailers will be even higher for remote retailers.  

These difficulties only serve to underscore the inadequacy of state sales and use taxes to fairly tax its residents.  Courts have ruled that taxes can neither discriminate nor be an undue burden to collect.  In a time where state borders are becoming more transparent, it is clear sales taxes are not only discriminatory, but would be an undue burden for remote retailers to collect too.   

Just like the Federal Tax Code, state taxing methods have become arcane, inequitable, and even more inefficient.  Retailers need to take more than just a stand for or against the collection of state sales taxes by remote sellers, but develop a long term position on retail sales tax collection in general which would advocate alternative to sales taxes for state revenue generation.