A recent New York court ruling that requires online retailers to collect state sales tax will not have an immediate impact in Massachusetts, but it could push Congress to change e-commerce laws so states can claim billions in tax revenues lost to online purchases.
The question of whether states can require e-tailers to collect sales tax is a long-running issue that has mostly been decided in favor of the online companies. Federal courts have consistently ruled that retailers must have a physical presence in a state — such as employees, offices, and warehouses — to be required to collect sales taxes. That has allowed online retailers to offer many customers tax-free shopping.
But New York and a handful of other states are expanding the definition of physical presence to include so-called affiliates, independent contractors who maintain their own websites and are paid to promote the Internet retailers on their sites. In the New York case, two of the nation’s biggest online stores, Amazon.com Inc. of Seattle and Overstock.com Inc. of Salt Lake City, argued that these affiliates were not employees and did not constitute a physical presence in the state.
Massachusetts has not adopted an affiliate law similar to New York’s, although a few lawmakers have proposed it. The Patrick administration has shied away from such legislation because online retailers have simply ended their contracts with the affiliates in response, hurting small businesses and individuals providing the service.
In addition, the administration last year negotiated an agreement with Amazon to collect the 6.25 percent sales tax from Massachusetts residents beginning in November, after the Seattle company established a presence here by acquiring a local technology firm and signing a lease in Cambridge.
Ultimately, administration officials said, the solution lies with Congress, which has the power to require online retailers to collect state sales taxes. The National Conference of State Legislators estimated that states lost $11.4 billion in sales taxes to online purchases in 2012. Massachusetts lost more than $130 million.
“We will continue to urge Congress to make a change in the federal rules to level the playing field,” said Alex Zaroulis, spokesman for the Executive Office for Administration and Finance, in a statement.
Bricks and mortar retailers have also pressed Congress to act, arguing that the current system gives their online competitors an unfair advantage. And momentum for action is growing. The Senate last week, by a 75-to-24 vote, passed a budget amendment that would allow states to collect sales tax from Internet retailers.
The vote was viewed as largely symbolic, since the House and Senate appear unlikely to agree on a budget. But it was also seen as an indication of changing sentiment in Washington.
Attitudes among online retailers are also shifting, said Navjeet Bal, who served as commissioner of the Massachusetts Department of Revenue from 2008 to 2011. During her tenure, she said, “the conversation changed from being totally against it to wanting a national solution.”
Part of the problem, online retailers have complained, is the complexity of collecting sales taxes from so many jurisdictions. Many states allow counties and municipalities to impose sales taxes, so rates vary not only among states, but within some states themselves. Massachusetts has a single sales tax rate.
Megan Knisely, director of affiliate marketing at Karmaloop.com , said the Boston online retailer specializing in clothing, would welcome congressional action if it made rates more uniform and sales taxes simpler to collect. That would lessen the administrative and financial burden.
She said collecting sales taxes could become even more complicated if more states adopt affiliate laws similar to New York’s — and they pass constitutional muster.
“If this is something that individual states are going to continue rolling out,” she said, “eventually something will have to be done and a federal law will have to provide a blanket tax for everyone.”