A Taxing Challenge: Brick-and-Mortar vs. Click-and-Mortar

April 5, 2012 9:01 am

by Nathan · 29 comments

The Internet has revolutionized civilization. It’s medium has provided a new way in which to communicate and conduct business with our fellow man. E-commerce has ramped up heavily since the early 2000s and poses an interesting challenge to state governments in collecting sales taxes on purchases made online.

Right now, you’re supposed to file the sales tax due from online purchases on your Georgia income tax, but I’d say that few people actually know they’re supposed to do that and much less actually do. HB 386, passed this most recent session, changed the law for online retailers that have a physical presence in the state to include affiliates. You probably notice that some online shops that have a physical location in Georgia charge you sales tax if you’re a Georgia resident.

The arguement is that many people shop online retailers to avoid state sales tax and, in turn, hurt small brick-and-mortar businesses in Georgia. I’d say that’s partially true (not so much after you pay 5 or 6 bucks for shipping…depending on where you shop), but not true in every case. I generally shop Amazon to find better prices on products, or just to find products that I can’t find in my area.

Comes now, a ruling from a federal court out west that strikes down a similar law in Colorado:

The law had already been temporarily blocked in federal court last year, but U.S. District Judge Robert Blackburn’s ruling Friday permanently handcuffs it.
“I conclude that the veil provided by the words of the act and the regulations is too thin to support the conclusion that the act and the regulations regulate in-state and out-of-state retailers even-handedly,” Blackburn wrote in his opinion.
The law and the rules to carry it out “impose an undue burden on interstate commerce” and are unconstitutional, the judge wrote.

From reading the Colorado law, it sounds like the burden is placed upon the business who does not collect sales taxes to send the Colorado customer a tax document each year with the amount of goods purchased and the amount of tax due to the state. Failure to comply results in a $5 fine per infraction. It doesn’t appear that Georgia’s law will be as burdensome towards businesses in that respect, but it does make you wonder if the Amazons and other online retailers of the Interweb world will try to use the federal court ruling as precedent to strike down this portion of HB 386.

The AJC has an article on the tax bill here.

jiminga April 5, 2012 at 11:08 am

“Brian Robinson, his spokesman, said, “It levels the playing field for the Georgia job creators who pay not only sales tax but also property taxes here.”

A not so minor correction for Mr. Robinson. Retailers don’t pay sales taxes, consumers do. Retailers act as collection agents for the state and local taxing authorities. And property taxes have nothing to do with retail sales taxes.

The AJC article seems to claim ignorance of the fact that Amazon has actually terminated affiliate relationships in many states when the states implemented internet sales tax laws. And they stopped construction on a distribution center in SC for the same reason. But then NC, SC and CA all backed down. This is just another way for government to intercede in private enterprise and pick winners and losers.

SmyrnaModerate April 5, 2012 at 11:57 am

That’s interesting about SC. I thought the few states amazon already collected tax in were the states it had distribution centers in. Amazons website indicates it collects sales tax in Kansas, Kentucky, new York, north Dakota and Washington state. Amazon has distribution centers in kansas and Kentucky, a customer service center in north Dakota and its corporate headquarters in Washington state. However, they also list distribution centers in other states they dont collect tax in. Perhaps that’s because, as the person commenting below said Tennessee did, those states waived it as an economic incentive to build.

SallyForth May 5, 2012 at 9:44 pm

jiminga, good point re the fact that we, the consumers, pay sales taxes. We already pay them on everything under the sun at all our retail outlets, and even for food when we eat out. So online shopping and saving a couple of dollars from time to time is our only little guilty pleasure. Please, GA Legislature, don’t take that away from us!

David Staples May 7, 2012 at 2:16 pm

…and on that note, I’d be fine with eliminating property taxes altogether. :-)

Jeremy Jones April 5, 2012 at 11:51 am

Being here on the border with TN, we have been close to this debate when Amazon opened a major distribution center in Chattanooga. TN promised to waive the sales tax collection aspect of it, only to go back on their word and pass a law to collect it, but that is a different debate.

The argument made in Nashville was similar to the one in Atlanta. “It is not fair to these local businesses. We will lose business to Amazon because of the sales tax.”

As an avid customer of Amazon, let me explain something. I have NEVER purchased anything from Amazon because of the savings of sales tax. I have often purchased from them for the convenience of it being shipped to my front door and their lower prices. Furthermore, whether the facility is in Chattanooga or Portland makes no difference in whether I buy it from Amazon or from the mom and pop store down the street. In other words, putting the facility in Chattanooga does not hurt any local business any more than putting it anywhere else in the country.

To the sales tax collection, let’s remember, since they are not a retailer, they make less of an impact on the local infrastructure. They do not have 10′s of thousands of cars coming through every week, do not require the police force, maintenance, etc.

I am not advocating they be 100% exempt from collecting sales tax. It is another example of where government needs to catch up with technology. However, I am 100% opposed to requiring them monitor every local jurisdiction and collect sales tax accordingly. I think making them charge the STATE sales tax is fine.

COBBPUNDIT April 5, 2012 at 11:54 am

Federal courts often rule on laws that have no national impact, think of federal districts as mini-nations ( the federal judges sure do) dealing with the unique issues within each state in the district or circuit ( for appellate courts). The Colorado law that was struck down is different from the law here in Georgia that was recently passed. The Georgia law has no reporting requirement when it comes to reporting who buys what off the internet to the state for sales tax purposes. Therefore our law has minimal if any privacy issues. This seemed to be what doomed the Colorado law. I doubt we will have the same problem here in Georgia and it should survive any court challenge.

SmyrnaModerate April 5, 2012 at 12:02 pm

That would depend on how courts view the “physical presence” requirement the supreme court imposed in 1992 for a state to collect sales tax. Quill v. North Dakota 504 us 298. Who knows how the courts would view the amazon affiliates program and whether it establishes the proper nexus as the supreme court ruling requires. If amazon loses it still could simply cut off all of its Georgia affiliates to no longer have the required physical presence.

COBBPUNDIT April 5, 2012 at 12:10 pm

Even minus the affiliate issue Amazon has a physical presence in the state through a subsidiary they own in Cobb County. That definitely satisfies the physical presence requirement.

Chuck Shiflett April 5, 2012 at 1:31 pm

You guys are focused on Amazon, but they are only 1 out of over 100,000 online merchants. Almost none, other than big retailers like WalMart, Taget, Home Depot, Staples, etc, have a physical presence in this state.

Engineer April 5, 2012 at 1:00 pm

One problem, here is a quote:

“Enforcing a reporting requirement on out-of-state retailers will, by definition, discriminate against the out-of-state retailers by imposing unique burdens on those retailers,” Blackburn ruled.

The main problem is that you are trying to enforce a tax over people that you have no legal jurisdiction over. Just like different laws in Florida don’t apply in Georgia and vice versa, this is the problem you run into with these internet sales taxes by state.

COBBPUNDIT April 5, 2012 at 1:30 pm

That is a fair enough observation by the Judge but it is immaterial to Georgia’s law since the law recently passed by the General Assembly has no such reporting requirement. That statement has nothing to do with the sales tax collection but rather forcing online retailers to collect sales information when their brick and mortar counterparts do not have to do so.

Chuck Shiflett April 5, 2012 at 1:24 pm

There’s a lot of misinformation out there about exactly what an affiliate is. I spoke with numerous legislators during the debate over HB386 and not a single one of them had a clue. The lady who sews custom quilts and sells them on eBay or the guy with a woodshop in his backyard who builds birdhouses he sells in the Amazon Marketplace are “resellers” NOT affiliates.

An affiliate does the same thing as your local newspaper. The newspaper provides content (news, sports, entertainment) and then sets aside a certain amount of space for ads. An Internet affiliate builds websites with content people want to read, and sets aside a certain amount of space for ads or links back to online merchants.

The difference is when you place an ad in the paper you pay upfront and the ad is not targeted to a specific group. Everyone who buys the paper sees the ad, and the majority of those who do see it probably have no interest in the product.

Online advertising is different… let’s say you love to snow ski so you build a nice 50 page website where you review ski resorts and also rate skis, snowboards, etc. you’ve used. On your webpages you then place ads back to online stores that sell snow equipment online or to sites like Expedia or Travelocity where folks can book ski vacations. Instead of the online merchants trying to keep track of the millions of websites in an attempt to find the ones that match up with their products, they leave it up to the website owner to search out merchants that match their site. The ads run for free, but if someone clicks on an ad on a site and makes a purchase, then that site owner (affiliate) receives a pay for performance advertising fee.

There is no way anyone can construe that an online merchant having an ad in the AJC constitutes physical nexus. (New York tried it and had their law overturned). So why do legislators think having an ad on a website constitutes physical nexus? In my case, all 128 of my websites are hosted on servers in the state of Washington. That’s a real stretch to say that I am now physcal nexus for Amazon and about 100 other companies I’m affiliated with.

Here’s another dirty secret… there are over 100,000 retail websites in the US but less than 1,000 have “affiliates” in GA. That means HB386 will only force an additional 1% of online retailers to now collect GA sales tax… of course that is assuming these online merchats don’t terminate their agreements with GA based affiliates… which would mean even the 1% would still NOT be collecting GA sales tax.

So HB386 does not level the playing field for GA brick & mortar merchants… bogus argument. HB386 also will not flood state and local coffers with new sales tax collections… bogus argument. No this is all about a pissing match pitting Home Depot and WalMart against Amazon.com. Home Depot and WalMart are not worried about losing sales at their local brick & mortar outlets… they are worried because they are losing online sales to other online merchants like Amazon that do not have to collect sales taxes.

Most GA “affiliates” may now be forced out of business after these web merchants terminate our contracts. In 2010 GA affiliates collectively earned $483 million… GA will now lose the income taxes we all paid on that, and those dollars will no longer be spent in our local economies… thus GA will take in less sales tax revenue as well. This issue can only be addressed at the federal level. There are 2 bi-partisan bills in Congress now that most K Streeter’s expect one will pass in 2013… and these bills are supported by web developers like me and by the Internet retailers like Amazon. All GA should have done this year is pass a resolution supporting the national solution just like 2 dozen other states have done. Instead they tried to get cute and attempted to do an end run around the U.S. Constitution. .. and will get nothing in return except destroy an entire industry in this state. I just learned of a company in Gwinnett County with over 40 employees that is now making plans to move to another state. All I can say is after a lifetime of working to build the GOP in this state, I now realize we have a bunch of folks who are bought and paid for by lobbyists.

fairnessforall April 5, 2012 at 2:40 pm

You wouldn’t happen to be an amazon affiliate would you?

Chuck Shiflett April 5, 2012 at 2:58 pm

Amazon only makes up a very small percentage of my online revenue, but if they pull the plug on GA affiliates, most of the other online merchants will can their GA affiliates as well.

Chuck Shiflett April 5, 2012 at 1:38 pm

Some of you may remember that 4 years ago Cabela’s planned to build one of its regional monster stores just off I-75 in Adairsville, GA (Bartow County). Cabela’s online store was a separate legal entity, but they placed computer kiosks for the online store inside of Cabela’s brick & mortar locations so customers could order stuff they couldn’t find in the store. Cabela’s asked State Revenue Commissioner Todd Graham for a letter stating that having Internet kiosks in the store would not constitute physical nexus for the separate Cabela’s Internet company. Graham and Gov. Perdue refused. Result? Cabala’s backed out and didn’t build the store. This is just another example of why we need a national solution for this issue.

Charlie April 5, 2012 at 2:18 pm

Take the exact same example, but call it Macy’s. Or Kroger.

Any merchant could set up a kisok, sell their wares “over the internet”, and then have their products “delivered”, perhaps even to the front of the store.

Sales tax is the one tax that most people can agree on as a revenue source. It is a major funding source for both state and local governments.

Whether consumers such as the commenters above want to say it is or isn’t a reason they shop online, it is a huge disparity between final costs for online vs. local retailers. As sales taxes continue to be the funding mechanism of choice – and thus continue to grow – the disparity will only grow larger.

Taxes should be as broad as possible in order to be as low as possible. Aruging that we lost a retailer because they couldn’t have an internet kiosk INSIDE their friggin store to avoid sales tax isn’t arguing against collection of internet sales taxes, it’s making the point of why we must have them.

COBBPUNDIT April 5, 2012 at 2:20 pm

I agree with you on the need for a national solution. One of the laws working its way through congress… Market Place Equity Act I think… would solve many of these issues, we should encourage our members of congress to support it. As for Cabela’s situation, if the online store was a wholly owned subsidiary then the kiosks were enough to constitute a physical presence within the state because when you think about it.. a kiosk, while a small presence is still a physical presence within the state. If they would build a store within our state over the issue of sales tax collection for online goods then they probably weren’t going to build one to start with. That’s an awfully small issue to kill a whole store over… why didn’t they just build the store minus the kiosks?

fairnessforall April 5, 2012 at 2:41 pm

I believe the former revenue commissioner was Bart Graham.. not Todd Graham.

Chuck Shiflett April 5, 2012 at 2:57 pm

You’re right… I’m battling a nasty cold and am in la-la land, so not sure where the Todd thing came from

CobbGOPer April 5, 2012 at 4:37 pm

I wonder when the government will start taxing our tax refunds…

Doug Deal April 6, 2012 at 3:12 pm

Or taxing our tax bill.

indrep May 5, 2012 at 2:43 pm

My first post, so let me know if giving a link is not okay. I saw this story today, published 4-26, at http://www.internetretailer.com/2012/04/26/amazon-tax-thrown-out-chicago-area-judge … “An Illinois law mandating online sales tax collection by e-retailers that maintain affiliates in the state was thrown out Wednesday by a Cook County Circuit judge.”

Is the GA law being challenged in court? Will our elected officials in the U.S. House and Senate attempt to change the commerce law to make the states’ taxation legal?

And will the taxation never end. :-( Our pockets are empty, our souls are trampled again and again by elected bearers of broken tax promises, and the debt WE THE PEOPLE owe as ONE NATION has our privates in a vise. We have to reduce our national debt, and our spending has to stop. Bring governance home…to the cities and counties. Not federal, not state, not regional, but locally.

P.S. I call for increased transparency as well, by outlawing riders to bills.

saltycracker May 6, 2012 at 5:14 am

One business mag columnist brought up an interesting suggestion to have a one rate national sales tax for on line sales and for the Feds to distribute it to the state of the purchaser. The states could sort it out from there.

SallyForth May 6, 2012 at 4:27 pm

There are online sellers who already do collect GA sales tax from us – but does the State ever get that money? If so, when the merchant sells lots of stuff, how does the Revenue Commissioner verify it’s the right amount? This may be my Rita Rudner moment, but does anybody know how that works?

saltycracker May 6, 2012 at 8:36 pm

It is an “honor” system, for the most part.

you May 6, 2012 at 8:57 pm

Just like with payroll taxes, the money better match up or you will be going to jail. When remitting sales tax one must also list the amount made in total sales for the month, including non-taxed items. At the end of the year all of this will match what is turned into the IRS. They can do an audit at any time if they believe something is not right.

saltycracker May 6, 2012 at 9:26 pm

So under report sales, particularly cash sales……payroll taxes ? pay cash/hire illegals… it’s the American way…
IRS might catch computer entries that don’t balance but for the rest, the IRS is shorthanded, example this week, didn’t you see the media reports on $4 billion +immigrant child care credits for dependents in Mexico ? 99% failsafe….

Time to overhaul the tax system…..

you May 7, 2012 at 6:22 am

You could cheat on your filings but I do not cheat on mine. I believe most are honest business people.

If by “overhaul” you mean the Fair tax, well people can cheat there too…”under report sales, particularly cash sales” or on the other end, you could do your purchasing in the blackmarket. I am sure theft will increase once sales tax is so high so there will be a blackmarket you could shop illegally in. Nothing is perfect.

saltycracker May 7, 2012 at 5:43 pm

I don’t, maybe because my income is reported via W2′s, 1099′s, etc. or maybe my preparer is pretty good with tax law or maybe I’m just a nice guy. I think most will push the envelope where they believe everyone is doing it.

Don’t see how one can interact with the world and not conclude the culture is becoming numb to cheats. I can think of several encounters in the last few days.

Nothing is perfect but the more complex the tax code is the bigger the errors and fraud. Gets too complex for the checkers to check.

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