12 States Where Amazon Is at War Over Sales Tax

Anyone who's saved money with sales-tax-free purchases online should pay attention: All that may be coming to an end as states try to recoup revenue to fill gaping holes in their budgets. Amazon.com, as the largest Internet-only retailer, with $34 billion in revenue last year, is facing the brunt of this pressure and is fighting back with all of its might. But retailers like Overstock.com and Zappos will also be affected.

What's at stake? Nationally, online sales are growing by leaps and bounds: Independent research firm Forrester estimates $53 billion was spent online during the 2010 holiday season alone and projects consumers will spend roughly $248 billion online — or 8% of all retail sales — by 2014. That's a lot of lost tax revenue.

The issue of collecting sales tax from goods sold online is contentious, complicated and ongoing. Technically, everyone should be paying sales tax on Internet purchases. If a retailer doesn't charge it, law-abiding citizens are supposed to offer it up voluntarily. But few know this, and rarely do states go after individuals.

In 1992 the Supreme Court actually ruled that retailers don't have to collect sales tax unless they have a physical presence in that state. So if a local electronics store ships nationally, only its local customers will pay the sales tax. National chains, like Sears, must collect state sales tax for online orders from everyone, while online-only retailers like Amazon.com don't collect from anyone, with a few exceptions (Kansas, Kentucky, New York, North Dakota and Washington).

But a lot has changed since 1992, and now states are trying to force the issue, claiming a retailer like Amazon must collect sales tax simply because of a physical presence, any physical presence. Proponents of taxing these retailers say it gives an unfair advantage to one class of merchant, and the Main Street Fairness Act seeks to even out the playing field. But fairness isn't as good a motivator as money, and now that states are in the red, we can expect the issue to really heat up.

The battlefield currently has many fronts, and here's a run-down of where Amazon is in various regions:

• In Texas, where Amazon has a distribution center, the state is demanding $269 million in taxes, estimating it loses nearly $600 million a year in tax revenue from online sales. Amazon is appealing the case and has threatened to close the distribution center, a move that will cost much-needed jobs.
• In California, there's pending legislation that claims if Amazon has affiliates in that state, those affiliates represent a physical presence and therefore Amazon must collect taxes. The complication is that the affiliates are all local businesses that make money simply by linking to Amazon's site. If a visitor to an affiliate site clicks on the link and makes a purchase, the affiliate gets a percentage. These businesses in turn pay state taxes on that revenue. In California and other states where this is coming up, Amazon has threatened to drop the affiliates.
• In Illinois, governor Pat Quinn signed into law a state version of the Main Street Fairness Act on March 11, classifying local affiliates as physical locations and requiring online retailers to collect tax in the state. And on March 13, Amazon gave notice to affiliates that they were being dropped. The CEO of an Illinois-based coupon site told the Chicago Tribune that he is seriously considering a move to neighboring Indiana.
• But there may not be many places to hide, as other states are following suit. The Vermont House of Representatives has passed similar legislation, sending the law to its Senate.
• Arizona, Connecticut, Hawaii, Minnesota and Mississippi are also considering "Amazon laws." Colorado, North Carolina and Rhode Island passed similar laws, and Amazon did indeed, break ties with affiliates there, although a federal judge has issued a temporary injunction blocking the Colorado law while it's appealed.

One thing is for sure, states will continue trying to get their due. Shopping online is certain to get a whole lot more confusing — and expensive.

Laura Heller is a freelance writer based in Chicago who specializes in mass market retail trends and consumer electronics industries. You can follow her on Twitter @lfheller. You can also sign up for an email alert for all dealnews features.