Lack of Internet sales tax pits small retailers vs. online giants

Arizona Capitol Times
Tuesday, July 19, 2011
Caitlyn Coakley

“It’s not fair,” said Gayle Shanks.

As the owner of Changing Hands bookstore in Tempe, Shanks is upset that her company cannot compete with Amazon. Not because the giant online retailer is able to price their products lower, she said, but because the Internet giant’s business model gives it a 10 percent advantage over her at checkout.

When Shanks sells a book, she is required to charge the customer 10 percent in sales tax. But online retailers like Amazon are exempt from having to charge that tax, ultimately making it cheaper for a consumer to buy online rather than from her store.

A 1992 Supreme Court decision ruled that online and mail-order retailers do not have to charge consumers sales tax if the company did not have a presence in the consumer’s state, opening the debate about what exactly constitutes a “presence.” A warehouse? A storefront?

For Shanks and other small business advocates, it’s ridiculous to read about Amazon’s planned 1.2 million square-foot distribution facility, which will be its fourth in the state, but to be told that the company does not have a “presence” in Arizona and therefore does not have to charge sales tax.

“There’s a larger issue now with nexus and what constitutes nexus,” she said. “But when the governor of Arizona stands at the new Amazon warehouse, looking over the X-square feet, this is a business doing business in Arizona.”

In recent years, states have been seeking ways to get around the decision and collect the sales tax revenue they believe is rightly their due. California, for instance, is currently battling Amazon over the right to impose a sales tax on transactions conducted by businesses in California that sell through Amazon; in response, the online retailer cut ties with all associates in the state.

In Arizona, where Amazon has three, soon to be four, so-called fulfillment centers, small business advocates have argued that the company does indeed have a presence in the state and that letting it get away without collecting sales tax creates an inequity in the tax code.

“It’s just patently unfair for a small independent retailer,” said Michele Ahlmer, executive director of the Arizona Retailers Association. “Why should they have to do a sales tax collection if somebody with a 400,000 (square-foot) warehouse in this state does not?”

The situation in Arizona might be even more complicated. A conservative Legislature that ran on fiscal responsibility and not raising taxes plus a muddled tax code may provide obstacles that can’t be easily overcome.

“Right now, you have variations not only from rates, but also the base,” explained Kevin McCarthy, president of the Arizona Tax Research Association. Some cities tax food, for example, but others do not. Those varying bases make it extra complicated for a business to try and figure out what taxes should apply to a purchase.

“That’s where the complications are for many businesses,” he said. “It’s not just on the rate side, but the administrative burden.”

A potential solution, said McCarthy, is to impose one uniform sales tax code throughout the state that’s based on an average rate from all counties and municipalities. But going by an average, he said, would invariably mean that some municipalities’ rates would go up, which could be a political death sentence for the Republicans who hold the majority in the Legislature.

“It would be grounds for someone to take shots to say ‘they raised my taxes here but they decreased taxes here,’” McCarthy said.

Arizona legislators have made some attempt at resolving the issue. A law passed during the 2011 legislative session, through an amendment on

HB 2332, requires that consumers keep track of their Internet purchases and report them on their tax forms.

Supporters said that at the least, the new law was a step in the right direction. But others, like Ahlmer, argue that it isn’t enough.

Shanks said it’s a burden for her to go through the trouble of collecting sales tax from customers and keeping those records while online retailers can shirk that responsibility.

“We don’t want the state of AZ picking winners and losers and deciding who has the onus of collecting sales tax and who does not have to collect sales tax,” she said. “I would love to be able to say to customers, ‘you just bought this $10 book, I’m not going to charge you that $1 sales tax, but you have to report it on good faith at the end of the year.’”

Groups like the National Federation of Independent Business (NFIB) and the Tax Research Association are sympathetic to the plight of small businesses and their competitive disadvantage, but they maintain that any change has to start with the tax code.

Farrell Quinlan, lobbyist for NFIB Arizona chapter, said that even if the state wanted to tax Internet sales, the tax code makes it impossible to do it right now.

“If we’re going to expect online retailers to collect sales tax, it’s got to be something where you type in the zip code and the software figures out the rate,” he said.

Politically, however, tackling the tax code will get sticky. Localities are likely to fight the idea of a uniform code, Quinlan said, based on the argument that it goes against the concept of local control.

Rep. Steve Farley, D-Tucson, said that he hopes to address the issue at the Legislature, but doesn’t expect anything to be done until after the 2012 elections largely because of the anti-tax Republicans in the Legislature.

“Republicans have an ideological problem in that they’ve promised Grover Norquist (president of Americans for Tax Reform) and everyone else that they wouldn’t raise any taxes,” he said. “I don’t have any illusions that we’re going to get this done in an election year, but I think it’s time that we start talking about having the political guts to solve this real problem.”

Not all Republicans in the Arizona Legislature are unwilling to take up the issue. Rep. Justin Olson, R-Mesa, said he’s troubled by the inequity and what it means for small businesses.

Last session, he grappled with a way to level the playing field for Internet retailers and brick-and-mortar stores alike without breaking his promise not to raise taxes. His solution, which was tacked onto his bill as an amendment sponsored by Sen. John McComish, R-Ahwatukee, was to expand the tax base to sales by a retailer with nexus in Arizona to an Arizona resident, but to lower the tax rate across the board in order to make the proposal revenue-neutral.

The overall lowering of the tax rate would help mitigate any increased tax burden on consumers, Olson said. But the amendment was stripped from the bill before it was passed, a move that Olson said demonstrates the resistance in the Legislature to make any move that could be construed as a new or higher tax.

“Even revenue-neutral tax reform along these lines is very controversial, because it is viewed as a tax that doesn’t currently exist,” he said. “There’s a substantial amount of education that would need to take place.”

Nevertheless, Olson said the question of Internet sales and taxation was one that would have to be addressed, and soon.

“Maybe not in the way that we were looking at doing it, but in some way,” he said. “This issue is not going away.”