Sales taxes are legally due for in-state transactions. The online retailer (e.g., Amazon, etc.) does not have the obligation to collect these taxes due to the Internet Tax Freedom Act (ITFA), enacted in 1998 and extended in 2001, 2004 and 2007 and remains in force until 2014, as well as legal precedence from the 1992 Supreme Court case Quill Corp. v. North Dakota. It should be no surprise that these legally due taxes are not willingly paid when state’s lack enforcement for sales taxes. Generally sales taxes on the Internet are not collected by any online retailer unless a company has a physical presence in the state.
Concurrently, the Great Recession has left many states with balanced budget amendments reeling. Sales taxes make up to one-third of most state budgets. A convergence of government and competitive pressures are being forced against online retailers are being played out in a very public fashion through the media and public referendum.
Amazingly, Wal-Mart, Best Buy, Home Depot and Target have been actively funding interest groups, such as Alliance for Main Street Fairness, that often target large brick-and-mortar retailers as well as backing state legislative efforts across the country to attack what they say are online retailers (e.g., Amazon’s) unfair competitive advantage. States are looking for additional sources of revenue without the political burden of raising taxes in a down economy.
I agree with Dr. Laffer’s assertion that collection of sales taxes can reduce the need for income taxes. With willing accomplices from major retailers pursuing policy as a competitive pressure, I doubt states’ willingness to make that reality.