The end of tax-free Internet shopping?

A court decision in Washington state appears to signal the beginning of the end for tax-free shopping on the Internet.

For Amazon and other pure-play E-tailers, this ruling isn’t exactly good news. A federal judge has ruled these companies have to open their sales records to state tax agencies, setting the stage for states to make a new run at sales tax revenue that has eluded them since the early days of E-Commerce.

And even if states can’t collect sales tax directly from E-tailers, there’s now a good chance customers will end up with a tax bill — one that will have E-tailers’ names all over it.

. . .

... next spring, North Carolina can send letters to residents saying, “You bought $117 of books, music and DVDs from Amazon.com, and now you owe sales tax on it.” That isn’t going to make customers feel happy about Amazon — especially when all that sales tax will be due at once.

What’s worse, even though Amazon fought and won its great battle to protect customers’ privacy, most of them won’t get that message. They’ll just hear that Amazon told the state about the books, music and DVDs they bought. Those customers won’t know what Amazon didn’t tell the state — just that the privacy of their online transactions was breached and Amazon must have been the one that did it.

There is a silver lining for Amazon, though. Now that Amazon has “won” its case, the door is open for North Carolina and other states with “Amazon tax” laws to go after other out-of-state E-tailers, too. That means Amazon will be turning over customer information, but so will all its E-Commerce rivals. With all E-tailers doing it, it won’t really represent a competitive disadvantage.

Well, at least not a competitive disadvantage against other E-tailers. But will this be a powerful competitive weapon in the hands of brick-and-mortar rivals? Will those physical chains—think of Sears, which has already laid the groundwork for an anti-E-Commerce tax argument—tell consumers, “When you price compare with Amazon, don’t forget to add in that wonderful bill you’ll get from the state, when it asks for all your E-Commerce taxes at once. Buy from us today, you get your item—and no mailbox mayhem.”

There's more at the link.

I'm sure that similar decisions will follow in other jurisdictions. What this means is that anyone selling anything over the Internet may, in time, be legally obliged to inform tax authorities in the purchaser's home state about the transaction. At the end of every tax year, the purchasers will receive bills from those authorities, demanding that they pay sales tax on their transactions.

Internet shopping has always had the advantage of being effectively tax-free (yes, I know that we're supposed to declare what we've bought online and voluntarily pay the tax on it each year, but how many people do you know who've done that?). Shipping charges have been a factor, but they've seldom amounted to anything like as much as the potential sales tax (and, for regular shoppers or larger orders, shipping has often been free of charge). Now that sales tax is about to be charged for all our Internet orders, whether we like it or not, we're once again going to have to compare prices with local stores, to work out how the latters' cost-plus-sales-tax numbers compare to the cost-plus-sales-tax-plus-shipping bill to buy online.

(Oh - and will we have to pay sales tax on shipping charges as well? Ten gets you one that our states' tax departments will try to make it so!)

Peter