, , ,

The battle over sales taxes online continues to rage! On one side, the states want to tax online retailers that sell to in-state customers. On the other side sits the Supreme Court, which has ruled this practice illegal, because the online retailer lacks a physical presence in the state.

North Carolina wants to exploit a loophole by taxing the marketing affiliates that maintain a physical presences in the state. A marketing affiliate receives a commission from sales online, which the state says is the same as a sales agent with a physical presence. The approximately 200,000 marketing affiliates in the United States drive $14 billion in annual revenue, and Forrester Marketing estimates they account for 8–20 percent of online sales. The largest online retailers, such asBlue Nile, Overstock, and Amazon, are fighting back by dropping marketing affiliates in states that demand sales taxes.

Yet the cash-strapped states see no alternative but to tax sales online that are yielded by the marketing affiliates; this revenue could amount to $150–$200 million, which might make a huge difference for states struggling to fund basic services.Texasis even investigating if it can prove Amazon.com has a presence in its state, through a subsidiary that handles distribution, in which case, Amazon might have to pay taxes both currently and retroactively.

Another player in this saga is the traditional retailers, who argue that online retailers enjoy an unfair price advantage because they do not collect sales taxes from customers and can thus sell at lower prices. All these stakeholders seem to have a compelling argument in support of their claims; the question that remains involves whose reasoning will hold over the long run.

Discussion Questions:

  1. Why are marketing affiliates fighting back against states’ desire to tax online retailers? 
  2. Why do traditional retailers agree that the state should collect sales tax revenue from online retailers?

Geoffrey A. Fowler and Erica Alini, “States Plot New Path to Tax Online Retailers,” Wall Street Journal, July 3, 2009.