2008-04-13

Double Taxation & the NY "Amazon" Tax

As has been widely reported, NY state's latest budget includes a provision to extend sales tax to some online retailers, including Amazon.com. Retailers with at least $10,000 in NY sales, and which have sales "affiliates", will be considered businesses with a NY presence and hence required to assess state and local sales taxes on purchases by NY residents. (The current combined sales tax rate for NYC is 8.375%.) This is known as the "Amazon tax" because Amazon is one of the few major web retailers which does not already have a physical presence in NY (this reflects the general trend since the .com bust away from web-only retail strategies).

It is not yet known how Amazon will respond to this move. There are two obvious options: (1) to challenge NY's law in court as a violation of the Supreme Court's 1992 decision Quill vs. North Dakota; (2) to terminate sales affiliate relationships based in NY. The first option may not prove successful as the 1992 decision was based on the premise that complying with myriad local tax obligations across the country would put an undue burden on interstate commerce; today, however, IT has made compliance far easier, certainly for the likes of Amazon. (A more promising route, I believe, would be to challenge the law's $10,000 threshold; but, assuming an alternative test can be found, it is hard to imagine how Amazon would not meet it.) Should Amazon lose or choose not to pursue the first option, the second will be short-term only as other states are likely to quickly follow NY's lead.

As a consumer, though, my primary complaint with the new law is double taxation. Like most states, NY requires residents to pay a "use tax" on purchases made outside the state. NY includes a line on its standard tax forms for this tax and requires it be filled in. While doubtless many do not pay this tax, failing to do so puts the (non-)taxpayer at significant risk should she be audited. For those that do pay the tax, there are two methods: either to tediously calculate the actual tax owed on each and every out of state purchase, or to pay an estimated amount based on income, which is obviously the popular option. Here is where the double taxation concern comes in: under the new law the "use tax" has not been repealed -- nor, so far as I know, have the amounts used for the estimation method been adjusted -- so the honest taxpayer will continue to pay the "use tax", but her income (on the basis of which the amount of tax is estimated) is not diminished by those out of state purchases on which she did pay tax. Effectively she will be taxed twice on the same purchases. (This was already the case previously when purchasing from out of state retailers that do charge tax on items shipped to NY.)

The estimation method of paying the "use tax" also creates a perverse incentive: honest taxpayers reduce their marginal rate of taxation (for a given income) on out of state purchases by making more such purchases! For anyone who, like most NY residents, makes a substantial number of out of state purchases and uses the estimation method, the "use tax" regime actually encourages increased out of state purchasing, rather than establishing a level playing field for NY retailers. This effect is reduced as sales tax is levied by more out of state retailers, however the double taxation is then magnified.

Given these considerations, NY should either keep the "use tax" (at least for purchases over a suitably high threshold) and not require retailers to levy sales tax on purchases by NY residents, or the reverse. What the legislature should not do is, of course, exactly what they have done, maintain the "use tax" in full while extending the levy of sales tax by out of state retailers.

FOLLOWUP -- A nice article on related developments: Tax-free Internet shopping days could be numbered - CNET News.com

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