Let’s suppose you’re a basketball fan and March Madness has put you in the market for a new high-definition television, preferably one with a special Dick Vitale mute button. You find one down the street at a big chain store—Wal-Mart, let’s say. You’re about to buy it when you suddenly realize that, hey, if you buy the television online from Walmart.com, the retailer’s Internet site, you won’t have to pay any sales tax on it.
Last year, that would have worked just fine. But that was then and this is now. As of February, you’re paying sales tax on that purchase.
It was bound to happen. For years, sites like Walmart.com have been able to avoid sales taxes because of a legal loophole. Federal tax law mandates that a state may only levy sales taxes on goods sold by retailers that have some kind of “physical presence” in that particular state. A company based in Minnesota, for example, has to collect sales taxes on anything it sells to Minnesotans. Customers in other states get a pass.
Generally, the idea of “physical presence” is pretty straightforward. If a company has a store, a factory or some other major office or building in a state, it has a “physical presence” there. Amazon.com, for instance, collects sales tax in Washington, where its corporate offices are, as well as North Dakota, where its customer service center is.
That’s simple enough. But things get more complicated when it comes to Web sites of companies that also have actual “brick-and-mortar” stores. It would seem like a site such as Walmart.com should be collecting sales tax in, say, Tennessee, because there are Wal-Marts all over the state. Wal-Mart, though, has gotten around this in the past by establishing an online business entity—“Walmart.com”—that is completely separate from the parent company. “Walmart.com” is not “Wal-Mart,” so the “physical presence” of Wal-Mart stores (more than 2,800 of them nationwide) has been theoretically irrelevant to Walmart.com’s tax liability.
This has been a loose, if workable, legal fiction. From a customer service point of view, though, it’s created a number of problems, especially in the important retailer realm of returns and exchanges. If that television you purchased on Walmart.com was a dud, you couldn’t take it back to the Wal-Mart down the street to exchange it for a new one. The Wal-Mart store couldn’t do anything about it because, technically speaking, you purchased that television from another company. You had to send it back to Walmart.com instead. Needless to say, this made quite a few customers unhappy, and an impromptu discourse on interstate taxation policy from the store manager wasn’t going to make them feel any better.
State governments dependent upon sales taxes for revenue (only four are not) weren’t pleased with the situation either. States have pushed online retailers like Walmart.com for years to start collecting sales taxes on customer purchases. California has been particularly aggressive. There, state regulators ruled that Barnesandnoble.com had to collect California sales taxes because Barnes and Noble stores had distributed $5 coupons for use with Web site purchases, establishing, for legal purposes, a physical presence in the state.
Things came to a head last month, as 38 states came to an agreement with 10 major online retailers, which promised to begin collecting sales taxes from their customers. In return for this, the states agreed not to push for the collection of back sales taxes even if owed (such as, for instance, if a Wal-Mart store broke policy by even once accepting a Walmart.com item for return, thereby exposing Walmart.com to permanent sales tax liability in that particular state).
In effect, the retailers got an offer they couldn’t refuse. The recession has put almost every state in hock and desperate for cash wherever it can be found, and it’s pretty apparent that the stores have crossed the line more times than they would ever admit. That’s why the names of the 10 online retailers joining the agreement is officially a secret—they don’t want the states that didn’t sign on (like California) to come after them for back taxes. The business press has figured out who most of them are, however, simply by going to their sites and seeing which companies were suddenly charging sales tax. Walmart.com is one. Toysrus.com is another. So is Target.com.
Tennessee was among the 38 states agreeing to the deal. So now we can close up that state budget gap right? Er, wrong. For all the hype about the millions of tax dollars Tennessee loses from Internet purchases, there’s just not much money to be had. Nationwide, the change is estimated to net only about $26 million this year, which is about 1/20th of the estimated deficit in Tennessee alone. We’re only talking about 10 retailers here. Plus, Tennessee can’t collect any of the back taxes—that’s part of the agreement.
Regardless, it’s not the amount of money that makes this significant—it’s the symbolism of the change. The beginning of the end of the Internet’s free sales tax ride is nigh. It may come even sooner than expected, as cash-strapped states push for an end to the long-standing federal moratorium on other forms of Internet sales taxation. It’s really too bad, because about the only thing online purchasing has going for it is the sales tax dodge. Without that, it’s really not worth enduring the many irritations of online purchasing—the shipping and handling charges, the lag time between ordering an item and actually getting it and the long-distance customer service hassles.
But it all works out in the end. Go to the store or go online, and you’ll still get your TV. Tennessee’ll get a little cash in either case, and you’ll get to experience March Madness in all of its high-definition glory—including hours upon hours of Dick Vitale, which makes paying sales tax on the Internet seem pretty painless by comparison.
