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Should Internet Diamond Web Sites Pay State Sales Taxes On Your Engagement Rings?
Yes, say Brick and Mortar Retail jewelers who maintain that they are at distinct disadvantage versus their Internet competition and thus not operating on a level playing field. They are lobbying State legislatures as well as the Federal Government to enact law that will require Internet Jewelers and all Internet vendors to collect sales taxes.
What has operated in favor of Internet vendors is the strict definition of what constitutes an actual place of business, thanks to a 1992 U.S. Supreme Court decision. In Quill v. North Dakota, the court ruled that a company must have a "physical presence" for a state to require that company to collect sales taxes.
The Quill decision underscores an irony: While retailers and their affiliates may benefit from not charging online sales tax, the states those businesses are located in stand to lose big money every year. States are losing between $10 billion and $25 billion a year in online tax revenue, according to the Multistate Tax Commission in Washington, D.C. That's money that would find its way into state treasuries if those sales took place in physical stores within their borders.
Case in point is Amazon.com. Amazon's report to the Securities and Exchange Commission acknowledges that the price advantage with which the company starts out vis-à-vis local stores and other competitors that are obligated to charge sales taxes is a key strategic asset. By claiming sales tax immunity in the vast majority of states, Amazon has enjoyed a 5 percent to 10 percent price advantage over local retailers, while also depriving states and localities of hundreds of millions of dollars of revenue each year.
As the Internet grows and consumers make more purchases online; State legislators will face increasing pressure weighing the issue's political implications vs. the need to raise needed revenue to pay off increasing deficits. Tax scholars will continue to debate exactly what defines a business' "physical presence" in the context of 21st century Internet-based commerce, and the patchwork of different sales tax laws and relationships with the online business model will likely stay a muddled mess.
Our view is that with the current deficit ridden state of the US economy, the explosion of Federal entitlement programs, erosion of the tax bases due to rising unemployment, the pressure to enact Internet tax collection across State lines may very well become a reality sooner than you think.
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