This Week’s Column:


... a MobyLives guest column
by Maud Newton

The case of California v. Barnes & Noble (see this Reuters wire story, previously on MobyLives) makes evident the general perception that online retailers don't have to charge taxes, and reveals that prices thus lowered are giving some online retailers a competitive edge. But is it even true that online retailers don't have to charge for taxes? Maud Newton has some surprising answers, and explains some of the just–as–surprising ramifications ....

5 May, 2003 — Contrary to popular opinion, the Internet Tax Freedom Act doesn't exempt all Internet sales or online sellers from tax. The reason customers don't pay sales tax on many Internet purchases is that, without Congressional authorization, the states can't force out–of–state Internet sellers (like Amazon, which has a physical location and sales people in only one state) to collect the tax.
      Theoretically, consumers are required to pay sales (or use) taxes directly to the states on Internet and mail order purchases. Of course almost no one actually does this.
      Traditional, store–based chains (called "brick–and–mortar retailers" in sales tax parlance) are already required to be collecting sales taxes in every state where they have a physical location, regardless of whether the transactions occur over the Internet, or in person.
      Some companies, such as Barnes & Noble, have tried to avoid the obligation by spinning off subsidiaries and maintaining separate online and real–life operations. Efforts to contain online and physical transactions in separate entities are one reason customers are sometimes unable to return online purchases to retail chain stores with the same name.
      In reality the operations of the parent and subsidiary are almost always interconnected (cross–advertising, cross–promotion, joint warehouse facilities, joint HR). Under the laws of many states, these connections create an "attributional" physical presence for the Internet sellers, and the states are starting to go after them for failing to collect taxes on their online sales.
      The California Board of Equalization's decision that had to pay taxes on sales to California residents who redeemed $5 discount coupons passed out at Barnes & Noble stores during the Christmas shopping season in 2000, then, wasn't some form of state overreaching, but was in line with the basic concepts of the sales and use tax.
      It remains to be seen whether Congress will act to give the states authority to impose tax collection obligations on companies like Amazon — companies that don't have a physical presence, and therefore don't have sales and use tax responsibilities, in many states. With powerful retailers like Target and Wal–Mart on board, and state economies in a tailspin, Congress might be willing to take a look at the issue.
      Despite urging from most state governors in the last couple of years, however, Congress historically has steered clear of the debate after calling for states to streamline their sales and use tax systems several years back.
      I'm not a fan of the sales tax. It's a regressive tax that disproportionately affects lower–income people. But with states already scrambling to make up for budget shortfalls resulting from the economic downturn, massive reductions in income tax revenue, and a phase–out of estate taxes (for states that tie their estate taxes to the Internal Revenue Code), they can't afford to keep losing sales tax revenues they used to collect from in–state retailers.
      Moreover, since many lower–income consumers lack the resources to purchase books and other items online, the effective loophole for Internet purchases benefits the upper and middle classes, and operates to make the sales tax even more regressive than it otherwise would be.

Maud Newton is a former state tax attorney turned legal publishing executive who still likes to opine about all things tax–related. Visit her website,

©2003 Maud Newton


Write to Moby
Letters policy: All letters must be signed. Also, please say where you’re writing from — either an affiliation or hometown.
All material not otherwise attributed ©2002 Dennis Loy Johnson.