Arizona benefits as Internet sales-tax issue is debated

The Arizona Republic
Sunday, July 10, 2011
Betty Beard

Arizona has been able to attract Internet businesses in part because it does not tax online sales. But the "tax or not to tax" debate still rages in some quarters.

Internet retailers generally cannot be forced to collect state sales tax, although Arizonans are supposed to pay "use taxes" for any online purchases they make for which they pay no Arizona sales tax.

In 1992, the U.S. Supreme Court ruled that a state cannot force online or mail-order retailers to add state sales tax if those retailers have no physical presence in the state. As online sales have grown, that has created friction between big online retailers such as and that don't collect taxes, and the brick-and-mortar stores that have a physical presence and have to pay sales, property and other taxes and fees.

It also has been a sore point for states and other municipalities hungry for sales-tax revenue, especially because of deficits that are running into the millions and billions.

Amazon, of course, has three, and soon four, fulfillment centers in the state and many employees. But it is debatable whether those centers are considered a physical presence subject to taxation, according to Kevin McCarthy, president of the Arizona Tax Research Association.

The centers are largely warehouses in which goods are stored until they are sold.

Jonathan Johnson, president of Salt Lake City-based Overstock .com, said it made sense not to make remote sellers collect sales taxes and distribute them to states and municipalities because there are about 1,000 or more taxing jurisdictions in the U.S., and they all have their own rules or tax holidays. The whole situation is too complicated for even computer programs to keep track of, he said.

"Some people (in some jurisdictions) say you don't have to collect taxes on clothes in the back-to-school season," Johnson said. "Well, back-to-school may be five days. Or in another place, it might be five weeks. Some treat gum as a candy and it gets taxed one way or other. Some treat gum as a food, and it gets taxed one way or the other."

Arizona's tax structure is especially messy because unlike most states, it allows cities to impose sales taxes, McCarthy said.

"We have a really, really desperate situation in Arizona because we have maybe the most chaotic state and local sales tax structure in the United States because we allow an independent municipal sales tax system," he said.

"In Arizona our system is so complicated you are lucky to figure out what your obligations are if you are an Arizona business, let alone trying to impose that on a remote seller in Alabama."

Nevertheless, the association has been trying to work with municipalities to standardize their taxes to help local businesses as well as to set up the state someday for Internet taxes. Arizona could use the revenue.

The National Conference of State Legislatures last year estimated Arizona could gain as much as $708 million in 2012 by taxing more Internet, Home Shopping Network, catalog and other out-of-state sales.

Arizona shoppers have an incentive to shop online and avoid paying sales tax because sales taxes in many cities already exceed 10 percent, McCarthy said.

Johnson, though, contends that states that start taxing Internet sales don't make as much as they expect to because consumers can just shop around to find a retailer in another state that doesn't charge taxes.

"We ( and don't suffer," he said. "The people that are suffering are those small businesses in California that Amazon and Overstock and other retailers have turned off because we don't want to be tax collectors for the state of California. We have no physical presence there."