AMZN Amazon.com Inc

By Laura Stevens 

After spending years fighting Amazon.com Inc. to force it to collect sales taxes, U.S. states are turning their attention to the individuals and small companies that account for a growing share of the online marketplace's sales.

Starting April 1, the Seattle-based giant will expand its sales-tax collection to all 45 states that tax sales. But most third-party sellers remain elusive, giving them a pricing advantage -- about 10% in some cases -- over local brick-and-mortar retailers and products sold directly by Amazon.

States such as New York and Wyoming are cracking down on a practice that leads them to miss out on billions of dollars in revenues. At least six other states are considering new measures this year that aim to force marketplaces such as Amazon and eBay Inc. to collect sales taxes on behalf of those selling merchandise on their sites or to force sellers to report sales, according to the National Association of State Budget Officers.

The effort is likely to create a logistical headache for third-party sellers, opening them up to problems if a customer returns an item directly, for example. It also may require the companies to hire new staff and set up new divisions for collection.

That type of requirement would raise costs for sellers and "make small retail less competitive and disadvantaged," said Brian Bieron, eBay's executive director of its global policy lab.

Third-party sellers, which now account for more than half of Amazon's sales, often are small businesses that say they aren't able to easily track where their goods are held and sold, and don't necessarily know what might trigger the need to collect and pay sales tax in states outside where they are based.

Under current federal law, retailers are required to collect sales taxes only in states where they have a physical presence. That means that if a seller is based in New York and only has operations in that state, they would collect sales taxes only from New York customers. States are trying to enact legislation or trigger court battles to change that, requiring a New York-based seller to collect sales tax for customers outside their home state, too.

It gets a little more complicated to figure out tax liability when factoring in Amazon's fulfillment program, where sellers ship merchandise to warehouses around the country, something that may trigger the physical presence requirement.

And even if a retailer isn't required to collect sales taxes, states still ask residents to pay it themselves on their annual tax filing. Consumers rarely do.

Linda Miller, a mother of two who lives in Arkansas, used to price-compare with her Amazon app when she shopped at her local Wal-Mart, factoring in a nearly 10% discount which frequently prompted her to buy online.

She was surprised to recently learn about the sales-tax requirement from a friend. (Amazon this year started collecting sales tax in Arkansas on items it sells directly.)

"We were supposed to be paying it all along," Ms. Miller said. "I don't even know how you'd educate the buyers about that."

The disparity in sales taxes online and in store stems from a 1992 Supreme Court ruling that retailers need to have a physical presence in a state to be subject to collecting sales taxes. The decision, just before Amazon's 1994 founding, contributed to the online retailer's early success by bolstering its low-price image.

Amazon a few years ago abandoned its attempt to hold out on charging sales taxes and soon will collect them in every state. The retail giant has embraced building out warehouses across the U.S. in an attempt to get its goods closer to consumers -- a move in part to save on shipping.

States are under significant pressure to come up with more revenue, says John Hicks, executive director for the National Association of State Budget Officers.

The efforts to step up enforcement of existing sales taxes come as states battle an eroding tax base. Previous revenue streams from marquee taxes like those on cigarettes have declined as smokers quit. A rise in online shopping is compounding the problem by cutting into the once-steady flow of sales taxes.

Preliminary data shows state sales-tax revenues grew at a weak rate of just 1.7% in the fourth quarter, according to the State University of New York's Nelson A. Rockefeller Institute of Government. (Five states don't have a sales tax.)

Amazon collects the amount sellers charge and tacks on a sales tax if a seller asks them to. That money is passed to the seller, who is responsible for remitting the taxes to the appropriate state.

Write to Laura Stevens at laura.stevens@wsj.com

(END) Dow Jones Newswires

March 30, 2017 05:44 ET (09:44 GMT)

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