Amazon and California Reach Surprising Compromise on Sales Tax

The new law, that canceled the expanded definition of “nexus” enacted earlier this year, reinstates that definition a year from now. That new definition is reinstated as of September 15, 2012, the date Amazon has agreed to voluntarily begin collecting sales taxes, unless the federal government enacts a law authorizing states to collect sales tax from out-of-state vendors by July 31, 2012. In that case, sales tax collection could be delayed to as late as January 1, 2013, but no later. While this may reopen the issue in a year with other internet vendors, Amazon has committed itself to begin collecting sales taxes by then, so the largest online retailer will no longer pose an issue for California.

In the meantime, Amazon will be pushing for the aforementioned federal solution. There is a proposal on the floor for something called the “Main Street Fairness Act.” When the Supreme Court said that the states could not constitutionally require out-of-state retailers to collect their sales taxes, it implied that the federal government could use its authority to impose such a solution. The “Main Street Fairness Act” would allow the states, provided they meet certain requirements designed to ease the burden of collecting such taxes, to impose collecting requirements on internet retailers. California's interest in this piece of legislation may not be quite as enthusiastic, as it has obtained fully what it wants from Amazon and it is not clear whether a federal statute would be quite as favorable. Still, it would open up the opportunity to collect sales taxes from out-of-state merchants other than Amazon. Amazon has expressed strong support for legislation like the “Main Street Fairness Act” as it would simplify the process of collecting state sales taxes, and the firm may have concluded that it is inevitable that one day they will have to do so anyway. Simpler is better.

Illinois Senator Dick Durbin, the primary proponent of the “Main Street Fairness Act,” welcomed the California-Amazon compromise as a step in the right direction, while noting his belief that it is not fair to make Amazon have to deal with up to 50 different taxing authorities individually. In other words, in his view this settlement provides added reason for enacting legislation like the “Main Street Fairness Act.” It remains to be seen whether Congress, which has declined to act on this issue for decades, will now feel compelled to move. While technically this is not a tax increase, since people are supposed to be paying an equivalent use tax already, and the “Main Street Fairness Act” now has a proponent in Amazon, joining the states, the ABA and other retailers, many consumers are still likely to see this as a tax increase. Tax increases are rarely popular, especially ones like this that will affect just about everyone who purchases something over the internet. In a year when incumbents all across the nation can expect to be feeling the heat from voters, they may be ill-inclined to do anything that might anger them more, regardless of how they might personally feel about this issue.