The Dark World of Online Sales Tax – it Sucks, But Could Help

Written by Amanda Boehm-Garcia   // May 9, 2011   // 4 Comments

Photo by soukup

Tough choices…there are hard choices about bringing revenue and keeping states from going bankrupt. The philosophical argument here is this, “What is fair and what is common sense?”

As states are feeling the crush of state debt, budget cuts & job loss, it has become abundantly clear that they are getting more creative on how to bring in more bucks.

The next frontier is enforcing state sales tax for out-of-state retailers. I’m an avid internet shopper myself. However, being a California resident almost always guarantees that I will pay sales tax (at a whopping 9.25% – which is not even the highest tax rate in California). Plus, I get to pay shipping, handling and breathing tax. For the most part, I’m already acclimated to these overwhelming costs, so if something is imposed at the state level in California, I’m ready. It’s not so easy for residents in other states. How can we ask people that are taking salary cuts, paying exorbitant gas prices and forced to pay high prices for healthcare (that may drive them to bankruptcy), to shell out “just a little bit more”?

The (more recent) history of online sales tax

Online sales tax in history offers some insight as to why state governments have not established rules in the past and only now getting on the bandwagon. In the Supreme Court case of Quill Corp. v. North Dakota (1992), the ruling determined that states can only collect sales tax from businesses that have a physical presence (a.k.a. nexus…but then I think about Star Trek Generations) in the state. States are now working on expanding the definition of physical presence to get around this ruling.

What are some states doing now?

There are few ways suggested by states senates on how to get retailers to enforce state online sales tax or how they are currently accomplishing this feat. Here are few examples:

  • California:  the state senate tried to pass a bill back in 2009, but ultimately the bill was vetoed. Lawmakers were recently working on reviving an internet sales tax bill and retail giant Amazon, are threatening to end their relationships with over 10,000 affiliates in the state. Will California be saying, “Adios Amazon!” in the near future?
  • Colorado:  there is a court-imposed injunction currently. But if the law is allowed to go through, it would mandate retailers that don’t collect sales tax, to send an annual notice to customers how should be paid to the state of Colorado. Similar laws are active in Vermont, South Dakota, and Oklahoma. If these states were trying to start green initiatives, they may have just set themselves back 5 years if businesses have to resort to using snail mail to send out notices.
  • Connecticut: a new law requires online retailers to collect sales tax in the event that they conduct business that exceeds $2,000, plus any affiliates that also contribute to that $2,000 minimum. Additionally, .65% luxury tax is imposed on jewelry sales exceeding $5,000 – about $325, on top of a $5,000 purchase. For newlyweds that vehemently disagree with this tax, you can always opt for a fine cubic zirconium wedding ring.
  • Arkansas: A state law was passed last month commanding that tax collection responsibilities falls on internet retailers, including affiliates that make more than $10,000 in sales a year. Similar laws are active in Illinois and Vermont. It feels like the IRS benefits even more by getting free labor on tax collection efforts.
  • New York: Back in 2008 a law was passed that required internet retailers to collect sales tax. The law was challenged by the retail giant Amazon in 2009, but a 5-0 ruling  in favor of the sales tax law has kept online sellers collecting the sales tax ever since.

Will there be tax resistance on the horizon from small businesses? One can only guess…

And where do our sales taxes go?

Every state is different, but for the state of California, the base sales tax is 8.25% and its distributed as follows: 7.25% goes to the state (into the General Fund), 0.75% to local jurisdiction (city or county of place for sale or use), and 0.25% to local transportation fund(city or county of place for sale or use). The projected revenue of Sales Tax the State of California for 2011-2012 is $24 million dollars, or 27% of the total General Fund, as presented in the graph below.

Graphic by State of CA Governor's Budget Summary










That’s a Whole Lotta Tax Revenue!

For California, Sales Tax brings in 27% of the bacon. That says a lot about how reliant California is on consumer spending. But California is one of the many states enduring huge deficits in their budgets and do not have any laws in place for internet sales tax.

In theory, having some state-wide enforcement of sales tax on the internet could boost revenue and help minimize the cuts to education, social services, state health services, infrastructure and so on. Only a part of the much bigger issue of having a balanced budget, but establishing this type of law can have significant impact. The Graph below represents state of California projected expenditures for 2011-2012.

Graphic by State of CA Governor's Budget Summary










What does this mean for online retailers, say Amazon and others?

Amazon has some serious clout, when it comes to the online sales tax war. In most cases, they pull out of the state and discontinue their relationships with any affiliate businesses that do business in the state that become bad territory. Sadly, mom-and-pop enterprises don’t have the same kind of pull and have to buck up and charge sales tax. This can effectively wipe out an online business or have severe consequences for said small business for a lower profit margin. It may even extend to business being unable to hire more employees, fire employees, or offer less or reduced benefits.

On the other hand, in the eyes of wasteful spending at the court level, a nationwide minimum sales tax could just be what the doctor ordered. It is one part of the whole solution on our mounting debt burdens. Why not have a nationwide internet sales tax established? In summation, yes, more taxes just plain suck, but I don’t see any other revenue-generating ideas on the table.



  1. By eMoney, February 24, 2019

    I’m kind of torn on this issue. On the one hand I want to save as much money as possible on my online purchases, which I do quite a bit of purchasing on or Ebay. Yet at the same time I hate to see our public services suffer due to budget cuts. At the end of the day I think I’m willing to make the sacrifice. As you said once you live here you kind of get used to the high cost of living.

  2. By Eric, February 24, 2019

    The supreme court said these taxes are unconstitutional…..that don’t mean sh#t to the states. This country is turning communist…FAST! eMoney said he would hate to see gov. services cut, I say CUT THEM! It’s about time people start taking care of themselves in this country. Why, because I work hard and make a good living, I should have to pay to support some lazy azz? B.S.! This government is corrupt at every level…the tree of liberty needs watered with blood…….NOW!

  3. By eMoney, February 24, 2019

    @Eric – I like the police department, fire fighters, public school teachers so I would hate to see them go. They are vital to our society’s well being.

    I think we should raise taxes on the very wealthy who use loop holes in the tax code that they end up paying less taxes than the middle class, if any. If you cut spending on social services and unemployment you won’t solve the problem. I like how Clinton did things when he was Pres. He raised taxes and helped bring about one of the most prosperous eras this country has ever seen. He even left with a surplus, but oh yea that was instantly killed.

    I’m a hard working middle class guy myself. I don’t want my money going to lazy people either, but I think generalizing everyone as lazy is a very limited understanding of how truly complex the situation is. Keep in mind this recession killed 7.9 million jobs. I’m perfectly fine with my tax money helping less fortunate people. I’m sure the vast majority of those who lost these jobs, and don’t currently have jobs want to get back to work. It’s not fun being on unemployment or not being able to do something productive and meaningful with your life.

    Who knows tomorrow I can be the less fortunate one, not because of being lazy, but because life can throw a crazy curve ball.

    My advice is don’t under estimate life – it’s bigger than the government, liberal, conservative, etc…

  4. By John Dough, February 24, 2019

    @ eMoney and @Eric. Taxes are the income of the state, just like your payroll check is the income of you. When anyone says no more taxes, it’s just like saying no more raises at your Job. When you spend a bit more on your expenses as a person, to compensate you work a couple extra hours to raise your income. This is Taxes. The state is raising its income. Lowering taxes is similar to your job cutting hours, lowering your income. You cannot lower income while keeping spend levels the same, it makes no sense mathematically. I realize all of us Americans are hurting, especially in the job market. Those with jobs who are seeing hourly cuts know this better than anyone. There is a solution out there and raising taxes for the rich while cutting wasteful spending is the obvious solution, it is not one or the other, but both at the same time.


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