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.

Follow Anne on Twitter @GallowayVTD

Comments

  1. Deb Lockwood :

    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 that could be handled by fines from the police is a good place to start reducing some spending and sending non violent first time offenders to jail is another.This system is so far outta hand , that its costing us thousands in unnecessary tax dollars. How about fixing the messes you made here in our state to correct this budget and leave the little guys alone. It’s time YOU take responsibility for your abusive decisions and rectify the messes we already have. Stop abusive spending in this state and you will fix the problems.

  2. 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 is so successful as an internet merchant is the advantage we have under the current system in terms of sales tax for sales outside of Vermont. But there are many other reasons to expand our business in Vermont, not the least of which is the unparalleled quality of the workforce and the accessibility of our government.

    On the other hand, the implementation of the internet sales tax would result in a significant decline in our out-of-state sales which current account for about 40% of our $20 million in annual revenue. We have about 10 employees directly serving that market and our estimates are that we would see a 50% reduction in sales, which would, of necessity, result in an appropriate reduction of workforce.

    Vermont is an ideal location to establish an internet sales operation due to the quality of workers, the availability of cost-effective warehousing and well-established package delivery services. Because Vermont is a small market compared to the national and international market for goods,Vermont enjoys the results of companies establishing internet sales here in our state. This advantage is jobs as well as corporate and individual income taxes.

    The advantages for Vermont are jobs, usually well-paying jobs in call centers, pick & pack, customer service and administration. As my company expands into a regional retailer, we expect to maintain our central headquarters in Vermont for just these reasons.

    The internet sales tax legislation threatens this growing segment of the Vermont economy. Small Dog Electronics, Vt. Teddy Bear, Gardeners Supply, Vermont Country Store are just a few of the internet merchants with operations in our state that could be negatively impacted by this legislation.

    While it would seem on the face of it to simply create “an even playing field”, I do not think that it does, especially with sales tax-free New Hampshire a short drive away. Internet sales are here to stay and in our retail stores we have also had to deal with this reality. We operate in both worlds, bricks and mortar stores and virtual stores. We talk to our customers constantly about why it is import to buy locally,how local merchants provide that extra measure of customer satisfaction and how the Vermont economy benefits from local spending. We also recognize that some customers will prefer to purchase from Amazon to save a few dollars. It is simply our job to give them many reasons to buy from us at our stores.

    Much of the internet sales are now moving to sites such as eBay and Craigslist where capturing sales tax, even with this legislation would be challenging. Further, sales from internet companies outside of the USA would not collect tax and I would expect that there will be a growth of ecommerce off shore should this legislation pass.

    I don’t mean to single out local bookstores but the challenges to these companies go well beyond the internet sales tax issue. It is an issue of changing technology. With the growth of the Kindle, the Nook and now the iPad it is no wonder that traditional book, magazine and newspaper publishers and merchants are struggling to keep up with the pace of technological development.

    If the well-established internet merchants are forced to collect sales tax for other states, the administrative burden is significant (collecting taxes for over 8000 states and counties and cities), job loss is inevitable and the potential for expansion of Vermont-based internet merchants will be limited. It is a bad idea.

    It is also a tax increase to every day hard working Vermonters who now are able to purchase goods tax-free in some cases. Of course, they are obligated to pay use tax, however, you and I both know that is seldom paid.

    I believe the internet sales tax will depress a growing sector of the Vermont economy, will result in job losses and expands a regressive tax.

    Don Mayer
    CEO
    Small Dog Electronics

  3. 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!

  4. 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.

  5. Bob Rottenberg :

    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 not hearing enough of is “Here’s what I’m willing to do, or to do without, in order to help solve a problem that is way larger than any action any individual or small group or company can take alone. We’re in this together — so what’s the way out?

  6. Scott Mackey :

    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 and other online retailers simply terminated their affiliate relationships with affiliate web sites in those stats. This terminated the nexus and eliminated any requirement to collect sales tax on sales into NC and RI. It also meant that these affiliates lost income, which resulted in lost income taxes for the states passing the affiliate nexus laws. The same thing would likely happen if Vermont passed the Amazon Tax.

    Thanks for continuing you excellent reporting on tax issues in Vermont. Unfortunately, when it comes to tax policy changes that produce easy money with no pain, there is no such thing as a no brainer.

  7. David Usher :

    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 :

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

      • Christian Noll :

        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 you look at the Vermont Department of Human Resources website and look up all of the “Annual Workforce Reports,” you’ll see right around page 41-44 the “Turnover rate for state employment.” You will notice that CO or Correctional Officer is and has been, consistantly on the top of the list. In some cases its on the top by the HUNDREDS of employees before the second highest turnover.

        Look at it this way: If we only have approximately 850 correctional officers in the state, how do we justify loosing 400 of them in a single year? Guess what? The inmates aren’t quite that bad, its your fellow staff and I WILL reference my book Vermont C.O. The Truth of Attrition in that its all sworn testamoney.

        Oh yeah, you’ll hear things like; “Its not for everybody” and “It’s a tough job but somebody’s got to do it.” We’ll let me just say that; it is a tough job and FEWER people have to do it.

        It’s like Burlington Police Chief Michael Schirling said “The Vermont Department of Corrections is a broken system in that its a front based response system and needs to become a back based preventative one.”

        The Chief was right, and yes he did say it.

        The Vermont DOC’s budget has increased more than 13% each year since 2000. The number of inmates has risen sharply almost doubling in the past ten years rising from 1000 inmates to 2150 in less than 12 years.

        Oh and by the way, that’s too high. Its costs us $58,000 a year in 2010 to house an inmate in Vermont. It costs us about half to have them serve their sentences out of state. It actually might be less than half at this point. It was half in 2007, but in 2007 the cost was closer to $48,000 a year.

        The Vermont DOC is the second largest budget in our state after “Health Care.”

        I’m working on this but we’re comming up with a number closer to 75 million. The problem is we’ve cultivated this criminal population into a business so to get that 75 mil back, we’re going to have to cut the jobs in those industrial complexes which live off of the incarcerated population.

        Dont get me started.

  8. steve merrill :

    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 :

      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 tax schemes are just pushing growth in the black market economy that already encompasses 15% or more of GDP.

      What if income taxes were cut (and we could trust that they won’t be raised again in a couple of years)? Higher income earners would be more likely to stay in or move to Vermont.

      What if the sales tax was cut to a level that was “insignificant” for most people…1 or 2%? There would be vary little drive to purchase goods out of state in order to reduce one’s tax burden.

      So what actions should we take?

      Get rid of the FED.

      Have honest monetary policy (i.e. commodity backed currency, no fractional reserve banking, government living within it’s means).

      Allow free markets to work, which means getting the government out of subsidizing some industries, creating monopolies and cartels (e.g. publicly funded education, single payer healthcare, the Federal Reserve Bank).

      Allow moral hazard to exist. The government should not be financially backstopping bad decisions in banking, industry, insurance, personal decisions/actions (e.g. eating so much that you become a sick-fat slob), etc.

      Do not use taxation as a coercive force to redistribute income (income = one’s life force as applied to helping others) or change behaviors. Education and personal responsibility changes behavior.

      Allow people to reap the rewards and punishments of their efforts.

      Strike down the American Empire builders (I agree with you 100% on the corporatist, drug running, military-energy-industrial complex).

      Eliminate the state-employee and teacher pension funds. Make government smaller since the vast majority of government expenditure does not produce anything, it only takes and consumes like a cancer.

      Perhaps the best step for us to take as Vermonters is to strike out on our own again and declare independence from the United States as it is now constructed. Our representatives, who prefer to be called our leaders these days, no longer represent us. Their actions demonstrate that they would rather pit us against each other (i.e. the “poor” vs. the “rich”, the “whites” vs. the “non-whites”) in order to keep us distracted from the real game which is to channel more and more of our (i.e. the people, 99.999% of the population) life force/energy, as measured by our work and rewards for that work, into the hands of the few that own and run the large corporate structures that dominate our world.

      When is too much taxation going to be enough? When is too much interest payment on money (created from nowhere) going to be too much?

      It is time that people really understand the reasons for our increasing poverty and say “No! Not any longer!” and reject the manipulated system that we now work and live within.

  9. Ray Kumar :

    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 putting them at a significant and unfair competitive disadvantage which has nothing to do with the merits of their business practices but merely on account of a loophole presented by a pre-internet era archaic supreme court ruling.

    The proper venue where this should be addressed is Washington, but in the present political climate anything labeled Tax will be regarded as Toxic for the political careers of our elected officials. Even if Washington were to resurrect the “Sales Tax Fairness and Simplification Act,” H.R. 3396 which died on the vine in the last congress, it only gives the force of law only to states which enacted the “Streamlined Sales Tax Agreement” which 24 states have so far passed. So, state legislators should focus on this step first.

    Big box retail and their commercial real-estate landlords must regard the present competitive handicap from online competitors as an existential threat and crank up their lobbying efforts.

    As a tactic to bring the issue to a speedier resolution, I suggest the following:
    For the major brick & mortar retailers who also have online operations, if they reorganize their online efforts copying the Amazon playbook of Entity Isolation to dodge the Nexus issue so they too can dodge the responsibility of collecting sales tax, the states will then face the specter of revenues drying up in a major way and this tactic will raise the political profile and urgency of this issue.

    An outfit called Alliance for Main Street Fairness (StandWithMainStreet.com) has been formed recently to lobby to end the present online sales tax loophole.

    This joke illustrates the pathetic lack of urgency by the states & the brick & mortar victims:

    A dog is lying on the porch whining softly.
    A passerby asks the owner what is wrong with the dog.
    thar’s a nail stickin’ up outta da porch tha’ he’s laying on.”
    Why doesn’t he move?
    “Donno. I reckon it don’ hurt bad enough.”

  10. Joseph Pierson :

    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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