The Amazon Sales Tax Debate

The online sales tax debate has been back in the news since June when the State of South Carolina filed a claim against Amazon stating that the company owed over $12.5 million in back sales taxes from the first quarter of 2016. Although Amazon maintains that the suit has absolutely no merit based on existing tax law, South Carolina insists that the $12.5 million constitutes a valid back tax balance and that interest and penalties will continue to accrue until the outstanding tax liability is paid in full. According to state tax officials, Amazon should have been collecting sales tax from sales made through third party sellers, which they failed to do. On the other side of the debate, Amazon maintains that they were not required to collect tax on the sale of these items since they were not selling them directly.   

Amazon already collects and pays the required sales tax amounts on items that it sells directly with the tax rates for these transactions determined by the state and local governments to which the sales are made. Although the online seller only charged a sales tax on items sold to customers in five states in 2011, it currently collects the tax from buyers in the District of Columbia and all 45 states that have a state sales tax. As is to be expected, no sales taxes are collected from online customers in Alaska, Delaware, Montana, New Hampshire and Oregon, states that do not have a sales tax in the first place. This is different from the situation that exists in most other countries where the there is a uniform sales tax rate. In these countries, Amazon collects the same sales tax percentage from all online customers.

However, it is not the direct sales discussed above that are the focus of the online sales tax debate. Rather, it is the sales made through third party vendors who currently make up over 50% of Amazon’s sales volume. As of 2017, the online retailer only collects sales tax on third party sales in four of the 41 states that have a sales tax even though it has an actual physical presence in the form of a distribution center or a subsidiary in some of the states where no tax is collected. Some state tax officials, such as those in South Carolina, argue that not requiring Amazon to collect taxes from sales made by third party sellers gives them a competitive advantage over storefront retailers who are required to add sales tax based on preset state and local sales tax rates. Although Amazon says that it would support some form of federal sales tax legislation as long as it was fair across the board, no such legislation has been passed as yet.

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