Tax reform part 3: Why the “Amazon tax” is a no-brainer

Photo of shopper in bookstore.

Mary Zentara of Tunbridge makes a purchase at Bear Pond Books in Montpelier. Photo by Josh Larkin

Editor’s note: This is the third article in a series about the Vermont Blue Ribbon Tax Structure Commission Report. In this story we analyze the commission’s Internet sales tax proposal. On Friday we examine its recommendations for income tax reforms (Part 4). On Feb. 14, we will report on tax expenditures (Part 5), and on Feb. 15, we will look at reform ideas that didn’t make the final cut (Part 6).

“Tax reform Part 1: Where policy meets politics” was an overview of the political context for the commission’s recommendations. In our second story in the series, we looked at the impact of the commission’s sales tax proposal,“Tax reform Part 2:Sales tax expansion would hit broad array of services.

Legislators come to the Statehouse prepared to solve problems and defend the interests of the people they represent – a cross-section of Vermonters in their home districts.

Though it’s impossible for lawmakers to please all people all the time, the last thing they intend to do is inflict pain on constituents.

That’s why budget reductions, program cuts and tax hikes are so difficult for the pols under the Golden Dome. Belt-tightening decisions and “revenue assessments” don’t necessarily enhance a lawmaker’s popularity with voters.

Painful choices, however, are inevitable this year as the General Assembly faces a $176 million shortfall. No one is enthusiastic about the austerity of the state budget proposed by the Shumlin administration, and there is also little appetite in Montpelier for tax increases (with the exception of the levies on hospitals, home health care providers, nursing homes, dentists and managed care organizations).

Still, once in a while, an idea surfaces that causes little or no local discomfort — that raises money, for example, without hurting Vermont businesses.

This year one of the top winners in the bullet-dodged, money-raised category is one of the Vermont Blue Ribbon Tax Structure Commission’s recommendations, the so-called “Amazon tax,” a sales tax on online purchases.

A bill already in the works has broad support in the House. Rep. Jeff Wilson, D-Manchester, has proposed a bill, H.143, with 20 co-sponsors that would require out-of-state Internet giants like Overstocks and Amazon to collect sales taxes on the products they sell to Vermonters. (Wilson also proposed a similar bill last year.)

Of the Commission’s four major recommendations, it’s also the one least likely to produce revenues in the short term. That’s because the federal government has made it very difficult for states to enforce Internet sales tax laws.

If Vermont could require Internet retailers to collect sales taxes on items sold in cyberspace, the state could bring in an additional $30 million to $40 million, according to the Commission’s report released last month. Vermont’s residents are supposed to voluntarily pay a 6 percent sales tax on online purchases when they file annual income tax forms with the state Tax Department. In practice, however, the honor system hasn’t been particularly effective.

The “Amazon tax” is an easy sell, not only because it could bring in significant revenues to the state and stabilize the state’s sales tax revenues, which have remained flat, but also because it would help to level the playing field for brick-and-mortar retailers that offer the same products, but are required by law to collect the tax. These stores operate at a significant disadvantage compared with their online counterparts. (Why buy a camera at a local store and pay a 6 percent sales tax, when you can buy one online and pay nothing to the state?) Lastly, the failure to collect the tax on Internet purchases “makes the sales tax more regressive,” according to Michael Mazerov, of the Center for Budget and Policy Priorities.

“It’s relatively middle and upper income individuals who own computers and have high speed Internet service who can take advantage of that loophole,” Mazerov said. “It’s low-income people who are consigned to shop in stores.”

The legislation may be a no-brainer, but it’s also no-go for the foreseeable future. A 1992 U.S. Supreme Court decision allowed Internet and catalog companies to forgo the collection of sales taxes if they don’t have a “physical presence” in the state where the customer makes the purchase. For 10 years, Congress has toyed with legislation to remedy the problem, but little progress has been made.

While the Vermont bill appears to be a win-win for lawmakers who want to help local brick-and-mortar retailers, one might ask: What good is it, if it can’t be enforced?

Eventually, the courts may rule in states’ favor, according to Mazerov, especially if enough of them pass similar laws limiting a local company’s ability to market products sold by a national Internet retailer. The legislation could also pave the way for Vermont’s Attorney General to join with other states in a lawsuit.

Wilson’s bill is modeled after a 2008 New York law that shifts the understanding of what it means for a company to have a physical presence – employees or office or warehouse space — in a given state. In addition to these criteria, it says that if a third party entity in New York state is engaged in sales on behalf of another business, that counts as a physical presence, too.

Those third parties are known as “affiliate” websites. Typically, the affiliates are online community newspapers or blogs that post ads for Amazon.com or Overstocks in exchange for a commission for every sale the online retailer makes. Any time you see an ad for say a Kindle on an independent website, an “affiliate” vendor is attempting to make a little money in commission sales of that product, Mazerov said.

“The New York law is one of those alternatives for chipping away at the problem,” Mazerov said.

In response, the Internet superstore has threatened to pull its marketing efforts with local affiliates. Amazon has also challenged the New York statute in court. In November, an appellate court judge upheld the constitutionality of the new law.

So far, four states have passed similar laws, Mazerov said. If states “hang together,” they can chip away at this problem, he said. In addition to New York, Rhode Island, North Carolina and Illinois (the bill is on the governor’s desk) have enacted laws that force Internet sales tax collection; Arizona, California, Hawaii, Mississippi, Vermont and Connecticut are weighing legislation.

“I think if a sufficiently large number of states enacted these laws, the retailer would begin collecting the tax,” Mazerov said. “This is a critical and cost effective way to market. They can get affordable solicitations from businesses without paying anything until the sale – that’s pretty cost effective marketing.”

Mazerov said there is “no realistic prospect of Congress passing a Streamline Sales Tax Agreement in the near future.”

Editor’s note: Bill Schubart, a member of the Vermont Blue Ribbon Tax Structure Commission, is the president of the Vermont Journalism Trust, the umbrella organization for VTDigger.org.

Anne Galloway

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14 Comments on "Tax reform part 3: Why the “Amazon tax” is a no-brainer"

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Deb Lockwood
5 years 6 months ago
Again, the people who use amazon and others as affiliates to make a little extra money in their pockets, you want to rob from them as well. Your not hurting the companies, your hurting the little guy who is barely making end meats now. It never ceases to amaze me how you all in the states capitol, run rampant on ridiculous spending, and than turn around and make the ones trying to put food on their tables your targets to fix what you messed up to begin with. The amount of my tax dollars being spent in stupid court cases… Read more »
5 years 6 months ago
WHOA, just a minute. The “amazon” tax does not “level” the playing field”, it makes it even more unlevel. Local merchants enjoy many advantages over internet merchants including convenience, service and instant gratification. If internet sales are taxed, Vermont loses revenue, jobs and economic development. I believe that Vermont has a significant advantage with the status-quo in terms of jobs, economic development and expansion of internet-based sales from companies located in our state. In addition, expansion of the most regressive of all taxes, the sales tax, disproportionately targets the poorer of our citizens. One of the reasons that my company… Read more »
5 years 6 months ago
The only effect this law will have is that thousands of affiliates will lose their jobs. Amazon and others will still not collect sales tax, since once they get rid of affiliates, they are not obligated to collect sales tax. What legislators need to understand is that affiliate marketers are not that important to online merchants, and therefore for online merchants it’s a “no brainer” to get rid of affiliates from working with their company. Please tell legislators to pass laws that don’t put 1000’s of workers out of jobs. This is a “no brainer” BAD bill!
5 years 6 months ago

If the internet was only in Vermont this is a good idea.

As it appears the net is in fact larger than Vermont – passing laws assuming the little edges around the state will somehow magically rise up and enforce this law shows that those attempting to write these laws do not understand the issue or the structures surrounding the issue.

It pains me to say so with the aptitude we currently have in DC, but this is a federal matter.

Those passing the law will feel good, enforcement will be impossible, and revenue increases will be zero.

Bob Rottenberg
5 years 6 months ago
Unfortunately, the responses so far all tend to point the finger somewhere else, and fail to address the persistent question of how to close the very real budget gap (except for the usual mantra of “stop spending on (fill-in-the-blank) useless program). All those commenting are right: adding this tax will create some problems. So what’s new? We certainly do have problems, and they won’t be solved by a growing NIMBY-style chorus. The easiest thing to say is “Don’t do this because it will hurt me.” The second easiest is to say, “Do something that will hurt someone else.” What I’m… Read more »
Doug Hoffer
5 years 6 months ago

According to figures from ITEP (a crackerjack policy shop) and published by the Public Assets Institute, the Bush tax cuts just reauthorized by Congress will provide a bonus of $190 million to the wealthiest Vermonters. That seems like a good place to start.

http://publicassets.org/publications/reports/federal-tax-cuts-can-help-close-vermonts-budget-gap/

Scott Mackey
5 years 6 months ago
There is another practical problem with the Amazon Tax proposal. Other states that have copied the New York approach (North Carolina and Rhode Island) have found that the legislation actually reduced revenues or had no impact on revenues. Here’s why: The legislation would, in effect, assert that Amazon and other large Internet retailers have nexus (responsibility to collect taxes) in Vermont if they have Vermont-based online marketing affiliates. These are Vermont-based web sites where Amazon and other online merchants advertise and generate sales, upon which they pay the Vermont web site a commission. In North Carolina and Rhode Island, Amazon… Read more »
David Usher
5 years 6 months ago

Look at it this way. Without the “Amazon tax” $30-40 Million remains in the hands of consumers who spend it freely rather than the state which often spends it far less efficiently. The economy is much better off with those $ Millions in private rather than public hands.

Vermont’s fundamental problem is not to find more revenue but to reduce public spending.

Doug Hoffer
5 years 6 months ago

please give us some examples of what you would cut to save $150 million

Christian Noll
5 years 6 months ago
Doug, This may not save $150 million but the Vermont Department of Corrections is a self feeding “Sap.” Our rough calculations show that if the very high and growing percentage of “Violent Offenders” who’ve been mis-sentenced, meaning they really aren’t violent at all, be reduced to below 8% we would save more than five million. Studies show that the police are actually a part of this since they arrest the offenders to incarcerate them. The correctional officer turnover rate is about 56% which guess what. Yep, you guessed it, it’s way too high. It’s always been that way too. If… Read more »
steve merrill
5 years 6 months ago

OK Then!! Don’t tax the rich (unearned income), don’t tax the corporations (mostly offshore now) and spend fully half our federal budget on “defense” (defending drug producers in Afghanistan & Oil Companies in Iraq) excluding the TWO wars and when we can’t afford to drive to “town” (empty storefronts in Newport) to buy necessities, tax the internet sales? OK then, I’ll just get a 3rd job to make ends meet, NO problem! SM, North Troy PS-Pls. raise my property taxes too so that the 50% of dropouts will know their “teachers” have good funded pensions!!

Ed Pomicter
5 years 6 months ago
Steve, I think that a third job may be a good idea for you. I have 4 jobs and that is why I am considered to be “rich” in this state. Taxation is not the key to bringing prosperity to Vermont. The key to elevating the living standards of all Vermonters is for the government to get out of our way. The tax-the-people, tax-the-“rich”-even-more experiment has proved to be a failure. There has not been a free market in this country for 80+ years and we are now reaping the benefits of bad theory and bad policy. All of these… Read more »
Ray Kumar
5 years 6 months ago
It is a wasted effort to correct the inequity of our antiquated sales tax system through state level legislation and predictably it has been frustrated using the courts & through intimidation of threats of job losses. And then there is the false popular perception expressed in the some comments here that the brick & mortar competitors ought to invest in technology to improve their efficiency, productivity and customer experience. Many do, but even then with the Nexus albatross which penalizes them for having a physical retail presence and burdens them with collecting sales tax which remote online competitor can dodge… Read more »
Joseph Pierson
5 years 5 months ago

What about New Hampshire having no sales tax? Every Vermont resident on the eastern side of the state can easily have access to tax free retail. I do not think this is solving the problem, it is just a quick way for Vermont to make money.

Why should online retailers pay taxes (assuming they have no properties in VT), they do not benefit from Vermont Police, Fire, Rescue, Schools, Roads, etc. All things that taxes are used for.

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