Editor’s Note: This is the first of a three part series looking at the issue of local and state sales tax collection on internet purchases.
Online shopping has become a normal part of most people’s lives.
According to the Pew Research Center, eight in 10 Americans now shop online for something, a huge increase from the June 2000 survey that found just 22 percent of Americans had made an online purchase. But as the amount of shopping done online increases, one issue has come to the forefront for communities all across the country: whether those purchases are subject to local sales taxes.
In the 2014 fiscal year, on average, 23.3 percent of state and local tax revenue in the U.S. came from sales taxes, according to the Tax Foundation, an independent tax policy nonprofit.
Mike Dumas, president of the El Dorado-Union County Chamber of Commerce, said the businesses that operate and collect local sales taxes to be remitted to the state are ultimately supporting the local community as that money will be used for community services.
“That money is coming back to support the local services that cities and counties provide, whether it’s police and fire protection or whether it’s streets and roads or parks,” Dumas said. “That business that’s taking money out of our community by selling their products and not supporting the local community, I have a real problem with that.”
The existing rule
Before the internet became a part of everyday life, the issue of how online commerce would be taxed was settled by the U.S. Supreme Court.
In 1992, the court ruled that an office supply company called Quill did not have to pay North Dakota sales tax because the company had no physical presence in the state, which created the precedent that a company only has to collect and remit local and state sales taxes in the states where it has a physical presence.
Since then, the internet has grown and online shopping has become the norm for many Americans. But the issue has yet to be revisited by the high court and the U.S. Congress has so far opted not to weigh in, leaving the 1992 ruling in place as the current standard.
But many states, including Arkansas, are looking to change that.
In the last legislative session, Senate Bill 140 was introduced by Sen. Jake Files, R-Fort Smith. The bill, which ultimately failed in the House, would have required out-of-state sellers with no physical presence in Arkansas to collect sales taxes on purchases in the state if the company sells more than $100,000 worth of products or makes at least 200 transactions in Arkansas.
Shortly after the bill went to the House in February, online giant Amazon voluntarily started to collect state sales tax on March 1 and the state started to receive payments a month later, according to the Arkansas Democrat-Gazette.
“Since that time, the overall increase has been pretty significant, around 5 to 7 percent increase a month over the same time period last year. Most of us attribute that to the ‘Amazon effect,’” Arkansas Municipal League executive director Don Zimmerman said.
Dumas is quick to note that though Amazon is collecting state sales taxes, it is only doing so on Amazon products, not products sold by a third-party vendor. Dumas said more than 50 percent of Amazon’s sales are for products sold by a third-party vendor.
At the time, Amazon said it would be voluntarily collecting state sales taxes in all 50 states. Earlier this month, Amazon announced its intention to look for a new location for its second headquarters and several cities, including Little Rock, have said they will seek the project.
An issue of fairness?
Online storefronts that aren’t based in the Natural State still use services funded by state and local taxes, Zimmerman said.
“When the out-of-state internet seller doesn’t collect the local sales tax they’d still deliver the merchants into the city, county or town and have to use the streets as the big trucks come in to deliver those packages. Those packages have to disposed of in the landfills.”
Ultimately, the loser in all of this is the small business market, AML’s director said. According to a profile published by the Small Business Association, there are over 240,000 small businesses in Arkansas.
“The city may lose 1 or 2 percent sales tax, the state may lose their 6.5 and the counties loses theirs but the merchant loses the whole transaction,” Zimmerman said. “Businesses are having to compete with out-of-state sellers that don’t collect (and are) not on the same playing field with them. They’ve got an advantage because they’re beating them by about 10 percent by not collecting the taxes for the state, cities and counties.”
Dumas agreed, saying the issue comes back to fairness to the brick-and-mortar retail shops that have made investments in the community.
“It just has to do with fairness,” Dumas said. “Let’s be fair, let’s give (entrepreneurs) a fighting chance.”