The Latest Twist in the Online Sales Tax Debate, or Why Blue Nile Might Move to Oregon

The push for an online sales tax has taken a surprising new twist. The way most proposals, including the one that passed the Senate, work is that residents pay sales tax based on where they bought the item from. So, a New York resident who buys something on the Internet would be charged New York sales tax. (And, in fact, as it stands now, most consumers already owe taxes for their Internet purchases; they just rarely pay them.) But opponents of online sales tax measures, including Chris Cox, an advisor to the NetChoice Coalition, an influential group that counts as members Google and Yahoo, are increasingly touting so-called origin sourcing.

This would mean that retailers would charge consumers tax based on where the company they purchased from is located. So any consumer buying from Amazon or Blue Nile would owe Washington State sales tax. This, advocates argue, is similar to how it works with brick-and-mortar stores. If you live in New York and buy at a New Jersey Walmart, you pay New Jersey tax. This raises an interesting question: Where does an Internet transaction take place? If I am a New Yorker who buys from Amazon, for sales-tax purposes, that transaction is said to occur in New York. This new proposal says that it takes place at Amazon’s headquarters in Washington. 

It’s obvious why Internet companies would want this deal. First, it gets the issue off the table, is arguably fairer than how things work now, and prevents states from hassling consumers to pay taxes on their purchases. (As some states are beginning to do.) Second, it eliminates what they see as the biggest administrative burden of these proposals: Having to calculate sales tax from hundreds of different locales. While there is software that can do this, businesses also worry that their books will now be subject to examination by hundreds of jurisdictions. As James Allen CEO Oded Edelman told me: “If the law passes, there may be a scenario where your company is audited by 50 states, and any business that is audited so heavily would have to close down just based on the accounting expenses alone.”

But looked at in a different way, it would give any company the ability not to charge sales tax. (And this is something that sellers of high-value items, such as jewelry, might want.) All it has to do is move to one of the five states with no sales tax: Alaska, Montana, Oregon, Delaware, and New Hampshire. It’s also quite possible that states will offer “sales tax holidays” to certain companies to prevent this from happening. Which is why some conservative commentators like the idea; it would lead to “tax competition,” as one put it. But it wouldn’t necessarily give brick-and-mortar retailers, particularly jewelers in high-sales-tax states, the level playing field that they have been asking for.  

And there is the technical question of where a headquarters is. Even though Blue Nile’s headquarters is in Washington, like nearly half of all public corporations, it was incorporated in Delaware and calls itself a Delaware corporation. Texas-based Zale is incorporated there, too. (Cox says home jurisdiction would be determined by where it has the “maximum number of employees.”)

Other ideas under consideration, according to The Wall Street Journal: “Requiring retailers to submit detailed information about purchases so the states could force buyers to pay use tax” and “giving states the right to exclude retailers from conducting business in a state if they refuse to collect the state’s sales tax.” Both of these would probably be even more unfavorable to e-tailers than simply requiring them to collect sales tax. 

In any case, while last year it appeared online sales tax legislation had some momentum, now it seems very much stalled. As the Journal notes, with House Republicans wary of anything tax-related, and Congress not able to get much done regardless, it’s “highly doubtful” any legislation will pass this year. Still, it adds, these new ideas could provide a template for further discussion. Will Blue Nile move next door to Oregon? Wait and see.

UPDATE: It seems that origin sourcing has already been declared “dead.” Everyone can stay where they are.

JCK News Director