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Retailers push for e-commerce sales tax

Say online sellers have advantage

By Jenn Abelson
Globe Staff / April 6, 2011

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The days of tax-free shopping at Amazon could be coming to an end — at least if merchants in Massachusetts and other states have their way.

Local retailers are heading to Beacon Hill tomorrow as part of a new fight to force e-commerce sites like Amazon, Overstock, and Zappos to collect sales tax from local residents.

The Retailers Association of Massachusetts for the first time is pushing a bill that aims to level the playing field with online behemoths who they say have an unfair advantage because they do not charge sales tax. With the backing of chains like Wal-Mart and Best Buy, the group is also launching a coalition to support the cause.

“If we have to collect sales tax, then so should our competitors on the Web,’’ said Jon Hurst, president of the retailers group, which is organizing the Massachusetts Main Street Fairness Coalition.

The pressure in Massachusetts comes as other states escalate efforts to collect sales tax from large online retailers. Similar bills have passed in New York, Rhode Island, and Illinois, and another dozen states are considering legislation. According to the National Conference of State Legislatures, states missed out on an estimated $8.6 billion in 2010 from failing to collect sales tax for online and catalog purchases. In the Commonwealth, the sales tax loss is projected at $335 million for 2012.

Erik Brynjolfsson, director of the MIT Center for Digital Business, said as a growing number of states pass these laws, it will become more difficult for Amazon and other e-commerce businesses to avoid the issue.

“There was a time when the Internet was a very small share of retail commerce and maybe it wasn’t worth pursuing, but now in a lot of categories, e-commerce is larger than offline retailers,’’ said Brynjolfsson, an MIT Sloan School of Management professor.

Representative Martin J. Walsh, a Dorchester Democrat who sponsored the bill, said it is too early to gauge support, but he hopes to see it advance within the year. “This is less about collecting taxes and more about a question of fairness,’’ he said. “This levels the playing field for retailers in Massachusetts who are losing sales to the Internet.’’

E-commerce businesses have been protected by a 1992 Supreme Court ruling that mandated retailers to collect sales tax only in states where they have a physical presence. The proposed bill in Massachusetts — scheduled for a hearing tomorrow before the Joint Committee on Revenue — expands the definition of physical presence to include what are known as affiliates.

Amazon and other online merchants hire affiliates, local businesses, blogs, and nonprofits, to advertise the e-commerce retailers on their websites. Amazon, for example, pays a commission to the affiliates when shoppers click through and make purchases on Amazon’s site. Some of the most popular affiliates include Upromise.com, RetailMeNot.com, and Ebates.com.

Amazon and Overstock have fought back against these efforts in other states by filing suits in New York and severing ties with affiliates to avoid collecting sales tax in Illinois, Rhode Island, and North Carolina. Both companies this week threatened to cut off all marketing partnerships with Massachusetts affiliates, including Upromise in Newton, if Walsh’s bill is passed. This would enable them to skirt the collection requirement so their customers could still shop tax-free.

“These laws are unconstitutional and very short-sighted on behalf of states,’’ Overstock president Jonathan Johnson said. “Rather than be forced to be a sales tax collector, we have terminated relationships in New York, Illinois, and in this case, we will with Massachusetts-based affiliates.’’

Paul Misener, Amazon’s vice president of public policy, said the Seattle giant opposes the Massachusetts bill. “Amazon will be forced to end advertising contracts with in-state associates if this passes,’’ he said.

There are roughly 5,300 affiliates in Massachusetts who earned $366 million from advertising revenue in 2009, the latest data available, according to Rebecca Madigan, executive director of the Performance Marketing Association. The industry trade group estimates that affiliates lose from 25 to 35 percent of their income when these law pass and that results in layoffs or companies moving out of state.

“Using local businesses to compel national online retailers to collect state taxes will do more harm than good,’’ said Debby Hohler, a spokeswoman for Upromise, which has about 150 employees in Massachusetts. “This proposal . . . would put Massachusetts jobs at risk.’’

But area retailers say online giants have an unfair edge. Changing the law at the state level is important because national efforts to streamline tax collection have languished and the explosion in mobile commerce has made it difficult for local shop owners to compete against online businesses that ship for free and do not charge taxes.

In Massachusetts, where the sales tax is 6.25 percent, Amazon customers pay $600 for a laptop while the retail store consumer pays $637.50.

Under Massachusetts law, online shoppers are supposed to voluntarily report the purchase when filing state income tax, but few consumers ever do and it is rarely enforced by the Commonwealth. Of the 3.3 million tax returns filed in Massachusetts in 2009, only 51,374 — roughly 1.5 percent — reported unpaid sales tax, according to the Department of Revenue.

Bob Bliss, an agency spokesman, declined to comment on the proposed bill but said the state estimates this year it will lose up to $189.1 million from failing to collect sales tax from Internet, catalog, and telephone businesses.

Jenn Abelson can be reached at abelson@globe.com.