With a new Amazon.com facility opening in Baltimore in 2014, online consumers in the state could soon be paying an additional 6 percent sales tax for online purchases.
A physical presence in the state means state officials will be able to levy the tax at the time of purchase from the online shopping giant — closing a tax loophole many consumers weren’t aware existed.
The 6 percent state sales and use tax on online purchases isn’t new, but it is underpaid. Most online goods come from outside the state, so the tax is levied when consumers indicate online purchases on their tax returns instead of when they purchase the product. The state doesn’t receive all the money it should, however, because most consumers don’t know to report it and state officials don’t have the resources for the thousands of tax audits needed to correct the problem.
The Amazon.com development is one more step in a decades-long legislative debate over online sales taxes. In 1992, the Supreme Court ruled online vendors had to have a physical presence in the state where the purchase was made for sales tax to apply — a frustrating decision for states that lose revenue from under-reported sales each year.
Many states have since jostled with the definition of “physical presence,” and local courts’ rulings from state to state have been anything but uniform. Maryland lawmakers unsuccessfully attempted to pass a bill in 2012 that would have broadened the definition of “physical presence” to include any partnerships with state businesses, even if the online retailer doesn’t have an in-state presence.
On the federal level, there’s the Marketplace Fairness Act, which would empower states to team up or meet mandates simplifying sales tax compliance to ensure consumers pay the sales tax.
State Democrats such as Sens. Barbara Mikulski and Ben Cardin, as well as Reps. Chris Van Hollen and Elijah Cummings, have voiced their support for the bill, which passed in the Senate in May but is still in committee in the House.
Supporters of the bill argue the legislation is necessary to level the playing field between online and brick-and-mortar stores. Though taxes apply at time of purchase at the latter, the Internet allows consumers to evade the tax entirely.
“It’s an incentive that just doesn’t make a lot of sense and just shouldn’t be there,” said Carl Davis, senior policy analyst at the Institute on Taxation and Economic Policy. “It’s important not to exaggerate the effect that the sales tax has at driving customers away from brick-and-mortar stores, but it does have an effect.”
Online sales are also more popular with higher-income individuals, while lower-income individuals are more likely to make purchases from brick-and-mortar stores, resulting in a tax burden unevenly distributed along class lines.
“Those without wealth don’t have access to credit cards and don’t have access to computers at home,” said Patrick Donoho, Maryland Retailers Association. “They have to pay it because there’s no way that they can avoid it.”
But Steve Stanek, research fellow at The Heartland Institute and managing editor of Budget & Tax News, said the bill could be creating more problems because it doesn’t actually mirror brick-and-mortar shopping.
“If I go shopping at a store here in my town or anywhere else in Illinois, I walk in and I buy whatever I want to buy and the retailer rings up the sale and applies the sales tax and we’re done. If I go to Wisconsin — same thing,” he said. “An online retailer would have to ask where you live and then would have to collect the sales tax for wherever you live.”
“It’s dangerous in effect to say we are going to make retailers in a different state follow whatever tax policy we have in this state,” Stanek said.
