Who Pays On-line Tax?

This time it’s about sales tax.  Late last week President Trump tweeted about Amazon.  One of his objections was that Amazon does not pay state and local taxes.  Whoops!

That should have set off alarm bells in the minds of anyone who really understands economics.  A couple of weeks ago I quoted a well-known French economist reminding everyone that “no taxes are paid by businesses: ultimately, every euro of tax is always paid by households…there is unfortunately nobody except physical, flesh and blood people who can pay taxes.”  He was writing about corporate income taxes at the time, but the same rationale applies to sales taxes.

This becomes clear when looking at any receipt from an on-line retailer.  Most have a subtotal line right on the form labeled “sales tax” or “estimated sales tax.”  Sometimes it’s filled in, and sometimes it says $0.00.  Legally, when a product is brought into the state “consumers who live in a state that collects sales tax are technically required to pay the tax to the state even when an Internet retailer doesn't collect it.”  Normally this only happens in the case of big-ticket items like cars and boats.

What happens otherwise depends on the laws of the state you live in and where the retailer is located.  Some states require taxpayers to keep track of their on-line spending and report it on their state income tax, adding it in as use tax. 

How many people pay that use tax?  The best numbers I could find agreed with other estimates I have heard – about 1.6% overall, with some variation between states.  Either through ignorance or calculation, that their state doesn’t have the resources to come after anyone for such small amounts, the vast majority skips it.

Ruling out ignorance because almost everyone has their taxes done by a tax preparer or by using the software, this becomes a responsibility issue.

The fact is that Amazon will never actually pay state and local taxes.  Today Amazon collects sales tax for most of the 45 states that have a sales tax.  They may at some point be required to collect the taxes and reimburse them to all states, but they will never directly pay them.  All taxes are passed through to us, the physical, flesh and blood people.  

So far the Supreme Court has refused to review cases to set a nationwide precedent on charging sales tax to on-line customers.  But if that happens, it will be to Amazon's advantage, since their size makes it more efficient to do, whereas their smaller on-line competitors will see a relatively large impact on their operations.  The big guys will once again come out ahead. And shoppers will lose the ability to sidestep sales tax, which was for them an added benefit to shopping on line.