Online Shopping Could Soon Get More Expensive. Here's Why

Out-of-print books, electronics, and that perfect handbag made by a crafter in Oakland: The Internet has long allowed Americans to buy stuff from sellers big and small all over the country.

It has also helped shoppers do something else: skip out of paying sales tax.

Now a number of cash-strapped states, including the third largest, are trying to make that a bit harder, and are stirring up hackles in the tech world in the process.

Earlier this year, New York Gov. Andrew Cuomo called for requiring so-called Internet marketplaces -- a group that includes eBay, Etsy and the giant Amazon marketplace, where shoppers by goods not directly sold by Amazon -- to collect state and local sales tax. Similar proposals are afloat in at least two other, albeit smaller, states as well: New Mexico and Rhode Island.

Your state not on the list? Don't be so quick to shrug it off. If successful, experts say, the moves could make online shopping more expensive for millions of Americans and less profitable for many small and midsize online merchants. That's because these efforts -- if written into law -- could quickly catch on with the other 45 states with sales taxes on the books.

"If it's a success in one state, others will almost certainly take it up," says Max Behlke, director of budget and tax at the National Conference of State Legislatures in Washington.

Of course no one wants to pay more for stuff online. (In New York, the typical sales tax rate is 8.49%, according to the Tax Foundation; in New Mexico its 7.55%, and Rhode Island charges 7%.) And the tech industry has been quick to argue that these effective price hikes could stymie plucky Internet artisans and entrepreneurs.

But the extra revenue -- New York's proposal could raise $136 million next year -- could go a long way to closing budget gaps in states for whom sales taxes are the largest single source of revenue, outside of grants from Washington for welfare programs like Medicaid.

What's more, while consumers may end up paying more, the proposals don't technically amount to a tax increase. Americans may have become accustomed to avoiding sales tax when they buy goods online, but legally they still owe it. Instead of being collected by the vendor, shoppers are legally required to track and report what they owe when the file their state income tax returns.

Few bother to do so, of course -- and the situation has infuriated brick-and-mortar merchants who argue that states' inability to enforce tax laws puts them at a big competitive disadvantage with online vendors. "It's a matter of survival for Main Street," says Ted Potrikus, president of the Retail Council of New York State.

A Years-Long Battle

In fact, states have been struggling to collect that online sales tax for years. In the past that battle has largely focused on online behemoth Amazon, whose rapid growth in the 1990s and 2000s was fueled by low prices that undercut traditional merchants. The advantage was due in part to Amazon's ability to avoid collecting sales tax -- which it took elaborate steps to maintain.

Amazon and other online retailers owe their special status to a 1992 Supreme Court case involving a pre-Internet catalog company. In the case, known colloquially as Quill, the high court ruled that -- although buyers may still owe tax after purchasing an item through the mail -- states cannot compel out-of-state vendors to collect and remit tax money, unless they have a physical presence in the state. The court reasoned that making companies comply with each of the over 6,000 state and local sales tax jurisdictions in the U.S. would stifle commerce.

States now argue, however, that the rapid growth in online shopping -- not to mention modern tax software -- have made that reasoning obsolete. In addition to seeking to overturn Quill, states have pushed Washington to address the problem. (The idea has enjoyed some bipartisan support, but Republican opposition to anything that resembles a tax hike has effectively blocked reform.)

And states have made important gains in one way. As Amazon's business model has shifted in recent years -- with less focus on rock-bottom prices and more on convenience and speedy delivery -- it has built dozens of distribution centers, giving it the physical presence required for states to demand tax payments. Just this month Amazon struck a deal to collect tax on goods it sells in Maine -- the last state with a sales tax where it had still refused to do so.

Next Target: 'Marketplaces'

Yet the retail landscape is changing as well, with more shoppers buying goods on so-called marketplaces -- including Amazon's. Last year shoppers purchased roughly $80 billion worth of merchandise from merchants on eBay and nearly $3 billion from the crafters on Etsy. And Amazon CEO Jeff Bezos has bragged that nearly half of the items sold through its site now come from third-party sellers on its own marketplace -- transactions on which the retail giant does not necessarily collect sales tax. (Amazon doesn't break out the dollar volume of those third-party items, but Morningstar stock analyst R.J. Hottovy puts the figure at roughly $170 billion.)

You may have an image of these sellers as mom-and-pop shops, crafters and old men selling baseball cards. And in many cases, that's not inaccurate. But many are also humming businesses. As many as 70,000 entrepreneurs had $100,000 or more in Amazon sales in 2015, Bezos has said.

They aren't necessarily shy about touting their tax-free status either, sometimes incorporating phrases like "NO TAX" in their names, lest potential customers have any doubts. It's no surprise then that these sellers have ended up in state legislators' sights.

The New York proposal, which would apply to marketplaces with more $100 million in sales and is embedded in Cuomo's state budget, is built on the assumption that even if New York cannot force sellers to collect sales tax, a middleman (like a marketplace) won't be able to claim that same exception.

And these large marketplaces already have infrastructure in place for doing so, critics say. Sites like eBay, for instance, already offer tools to help vendors collect sales tax in certain circumstances -- when a buyer is from the same state as a seller, for instance, and can't claim the out-of-state exemption.

Not surprisingly, the marketplaces have been staunchly opposed to any move that would convert them into tax collectors. "We’re very concerned about the governor’s proposal, which would harm New York-based startups and discourage other technology companies from starting or growing here," an Etsy spokeswoman said in a statement. Earlier this month eBay emailed New York-based buyers, urging them to fill out a form letter and send it on to New York politicians calling the proposal a "harmful Internet tax."

At least a handful of local legislators have taken the Internet companies' sides -- including those in Brooklyn, where Etsy has its headquarters. The deadline for Albany to adopt a budget is April 1.