RALEIGH — North Carolina’s so-called “Amazon tax” fails on all counts and deserves to be repealed when state lawmakers return to work next year. That’s the conclusion of a new John Locke Foundation Spotlight report.
“The Amazon tax generates confusion by creating three tiers of sales tax collection, imposes a new regulatory burden, and reduces economic activity by dissuading business relationships in the state,” said report author Fergus Hodgson, JLF Director of Fiscal Policy Studies. “In addition to these problems, there is also no evidence that the tax is increasing state government revenues.”
North Carolina is one of just nine states that impose an Amazon tax. It forces out-of-state retailers to collect taxes on online sales if the retailer has an online affiliate located in the taxing state. Affiliates include online advertisers, bloggers, or marketers based in North Carolina that receive a commission on sales.
The National Conference of State Legislatures estimates that untaxed online sales cost North Carolina $436.5 million in forgone tax revenue in the 2012 budget year.
“The trend of individuals toward buying online, avoiding state sales taxes in the process, has many legislators concerned, and in a bipartisan manner,” Hodgson said. “But even if one wished to maintain the sales tax rate and base, as online activity erodes it, there does not appear to be a mitigating policy that could originate from the North Carolina legislature.”
Congress might impose a national resolution, Hodgson said. “Until that happens, online sales from other jurisdictions will continue to generate pressure for North Carolina to lower its sales tax rate and reduce the disincentive for in-state purchases,” he said. “The state will also face increased pressure to rely less heavily on sales tax revenue to pay its bills.”
A 1992 U.S. Supreme Court ruling blocks states from imposing sales tax requirements on out-of-state vendors, unless those vendors have a physical presence or “nexus” in the taxing state. Thirty states responded by introducing some form of Amazon tax. Most states have seen these taxes repealed or blocked in court.
Hodgson rebuts a key argument conventional brick-and-mortar retailers use to support Amazon taxes. “These in-state retailers complain about an uneven playing field,” he said. “While out-of-state retailers compete with in-state retailers for customers, they do not enjoy the benefits of an in-state presence. This includes police protection, infrastructure, or any other government service.”
“Not only does the Amazon tax fail to achieve an even playing field, it also undermines the fair play argument,” Hodgson added. “That argument holds that one owes taxation only in exchange for government services received.”
North Carolina ends up with a confusing mix of three different levels of sales tax treatment, Hodgson said. “In-state retailers face taxation with government benefits, out-of-state retailers with in-state online affiliates face taxation with no government benefits, while independent out-of-state retailers with no North Carolina connection face no taxation and no government benefits.”
An Amazon tax also forces out-of-state retailers to monitor tax rates in multiple locations, Hodgson said. “There are almost 10,000 different and constantly changing sales tax rates across the United States,” he said. “Under an Amazon tax, online retailers are stuck with the regulatory burden of charging customers at a variety of rates that not even specialist firms can keep up with.”
There is no evidence that the Amazon tax has boosted state tax revenues, Hodgson said. “Projected revenues of $3.8 million in 2010 and $8.5 million in 2011 have simply failed to arrive,” he said. “The N.C. Department of Revenue has not recorded Amazon tax revenues separately, but we know that North Carolina’s sales tax revenues originating from out of state dropped 28 percent in the first year after implementation.”
Retailers can avoid the tax with ease, Hodgson said. “They can simply disassociate themselves with in-state affiliates,” he said. “Amazon.com did this before the law took effect, and an estimated 1,000 online advertisers terminated their North Carolina affiliates when the law passed in 2009. An estimated one-third of impacted affiliates moved out of state.”
While North Carolina should scrap its Amazon tax, Congress should be careful about taking action, Hodgson said. “If Congress does intervene, members ought to do so with an eye on a uniform, origin-based system,” he said. “By origin-based, I mean the applicable tax rate would be the one in force at the retailer’s location. This would avoid the regulatory burden of keeping track of different destination-based tax rates. It would also maintain the incentive for states to remain competitive in their taxation to invite business expansion.”
Fergus Hodgson’s Spotlight report, “The Amazon Tax That Was Not: North Carolina’s Failed Attempt to Expand Sales Taxation Beyond Its Borders,” is available at the JLF website. For more information, please contact Hodgson at (919) 828-3876 or [email protected]. To arrange an interview, contact Mitch Kokai at (919) 306-8736 or [email protected].