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Michigan lawmakers have introduced legislation that would require businesses selling items over the Internet to collect the state’s 6 percent sales tax. This bill is similar to a New York law that required remote vendors with any “affiliate” relationships in the state to collect sales taxes on all purchases made by residents of that state from the vendor. Essentially, laws like New York and Michigan’s proposed legislation target Amazon.com and similar stores by moving online-only retailers under the same sales tax collection laws under which brick-and-mortar businesses operate.
The Michigan Retailers Association has framed the need for this legislation as a way to prevent online retailers from using “legal loopholes” that allow them to avoid collecting state sales tax at the point of sale. The Michigan Retailers Association report that closing this “loophole” would:
- Lead directly to the creation of as many as 1,600 new jobs;
- Provide investment in Michigan’s economy in the form of sales at brick-and-mortar retail outlets, which would increase by as much as $126 million per year; and
- Eliminate the loss of $141.5 million in the form of sales tax from electronic remote sales in 2012.
The preceding numbers are projections that may or may not prove to be accurate, especially the job creation estimate.
In contrast to these estimates, within hours of a law similar to Michigan’s proposed internet tax law passing in Illinois applying its 6.25% sales tax to Internet purchases made in Illinois, Amazon announced it would discontinue using any of its 9,000 Illinois small business affiliates to avoid having to collect the tax. Whether a similar pull-out would happen in Michigan remains to be seen. But it is hard to ignore such historical facts in favor of hoped for possibilities.
Two issues to consider in regard to states seeking to impose their respective tax scheme on out-of-state, e-commerce retailers. First, such e-commerce retailers do not use state government services in the way that retailers do. Consider for example that Amazon’s Seattle offices will never be serviced by a Michigan fire department. It is, therefore, difficult to justify why an out-of-state retailer that is not benefiting from a state’s resources should now be subject to that state’s taxing authority.
Second, there is a real undue burden in telling a company, especially a “mom and pop” e-commerce business that it now must comply with 50 separate sales tax jurisdictions around the country. As an attorney that works with many online companies here in the U.S. and abroad, such compliance is definitely an expensive challenge.
For a great read offering more insight on imposing internet tax collection on e-commerce businesses, check out Adam Thierer’s article about alternatives to state Internet tax statutes.