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The era of sales-tax-free online shopping is nearly over. Here's how it ended.

Consumers in Utah, Hawaii, Idaho, Maine and New Mexico began noticing sales tax on their Amazon bills this year, creating a double take for a generation raised on the twin guarantees of free shipping and tax-free.

Utah's deal with Amazon began in January, and as of March, the giant online retailer began voluntarily collecting sales taxes from consumers in all states that have one.

The tax agreement also came well before Thursday's announcement that Amazon is will build a fulfillment center in Salt Lake County, though there is no direct connection between the two decisions.

The tax policy shift by Amazon came as pressure was building in state houses, Congress and courts to allow states to require retailers to collect the tax on out-of-state sales and pass it on to state governments. The current rules were laid down by the Supreme Court in a 1992 decision regarding mail-order catalog sales that many now consider hopelessly out-of-date, and they bar states from forcing out-of-state retailers to collect sales taxes.

As things stand, online retailers compete in two different tax systems: retailers located out-of-state pay no sales tax, while those with some link to the state must pay it. The differences between those two groups may have made sense in 1992 but no longer hold up today, as advancing software technology has made it ever easier to buy and sell — and equally easy to collect the correct sales tax, says Max Behlke, director of tax and budget policy for the National Conference of State Legislatures.

With an ever larger share of retail moving online, state and local leaders are making an argument for fairness, says Behlke. Bipartisan bills that would allow states to tax out-of-state sales are moving in both houses of Congress, supported by most of Utah's congressional delegation. The lone exception was Senator Mike Lee, but Lee's spokesman now tells the Deseret News that Lee is reconsidering his position.

State-level challenges from South Dakota, Massachusetts and a handful of other states are moving quickly through the courts, with a likely Supreme Court showdown in the offing.

But most observers agree that Amazon’s decision to begin collecting sales tax on its own sharply alters the political and economic dynamics of the debate. Amazon is thought to have accounted for 43 percent of all online sales in 2016. Of the top 10 e-commerce retailers, only one now does not charge tax. Most of the top 10 are the online versions of physical stores like Macy's, Wal-Mart, Costco and Nordstrom. So with Amazon now on board, most online consumers already pay taxes on most purchases.

And most seem to be OK with that. A recent survey of internet shoppers by Bizrate Insights found that nearly half did not consider sales tax in their purchase decision, and another 22 percent viewed it as only a minor concern.

A number of major outlets are still outside the box, however. Among those sued by South Dakota under its new sales tax law are Utah-based, tech retailer New Egg and Wayfair, a clothing outlet.

But the tax-free days for these outliers may be numbered.

Being there

If Congress doesn't act, the only other recourse for the states is to get the Supreme Court to reverse itself.

The Supreme Court has held that only Congress can authorize taxation or regulation of interstate commerce. But if a company has physical presence, a footprint in a state, that state can tax sales made by that company in the state. The question is, how big must the footprint be, and what must it look like? What does it mean to "be" in a state?

The Supreme Court laid down the current rule in 1992, in a case involving a mail-order catalog, holding that if a company had a storefront, employees, a warehouse or some similar footprint, the state could require them to collect tax on their sales. Otherwise, the state could not.

As online commerce began to explode in the 21st century, states became increasingly desperate to chase down that lost revenue. To do so within the Supreme Court's guidelines, they had to get creative.

For example, the failed Utah bill this year included a measure that raised the ire of so-called "mommy bloggers." To establish physical presence, it would have defined "affiliate marketers" — or bloggers who offer links to online retailers and take a share of any sales — as employees of the online retailer.

Online sellers faced with that threat would simply have dropped their affiliates, hurting the blogger without helping the state, according to Evelyn Everton, director of the Utah Chapter of Americans for Prosperity, a small-government advocacy group. That threat from the online retailers was real, Everton said, not speculative.

Massachusetts has a more elegant solution that leaves affiliate marketing untouched. The Bay State now holds that a company installing an app on a phone or a cookie on a computer constitutes physical presence in their state.

Cookies are tiny pieces of data that remember a consumer's identity and behavior. Massachusetts argues that these and similar software form a physical presence in the state. When a retailer installs an app on a phone or a cookie on a computer, Massachusetts argues, they are in the state just as if they rented a room.

Alabama, Tennessee and South Dakota are all laying down the gauntlet, urging the Court to set a new precedent. South Dakota's case is already at the state Supreme Court, where briefs are now being filed.

The next step after that would be the U.S. Supreme Court, if it takes the case. And there is good reason to think that it will, thanks to a loud signal from the Court’s bellwether justice. In a 2015 concurring opinion, Anthony Kennedy explicitly called for the 1992 Quill v. North Dakota ruling to be overturned.

“Today buyers have almost instant access to most retailers via cell phones, tablets, and laptops,” Kennedy wrote. “As a result, a business may be present in a State in a meaningful way without that presence being physical in the traditional sense of the term.”

Kennedy's call to overturn Quill stemmed partly from frustration with the failure of Congress to step in. In the 1992 decision, the Court had clearly signaled to Congress that the Commerce Clause put the ball in its court.

South Dakota's case is a response to Kennedy's call for a test case to overturn Quill. "We wouldn't have done it if Kennedy had not called for it," said South Dakota State Senator Deb Peters, the bill's chief sponsor.


Kennedy was also addressing a fundamental transformation of the economy that has occurred since 1992. At that time, mail order was a limited force, and the logistics of asking small out-of-state retailers to collect taxes were immensely complicated. Asking a company to try to navigate those waters with a confusing shelf full of tax codes would have been absurd.

Software today has eliminated that burden, says Craig Johnson, executive director of the Streamlined Sales Tax Governing Board, which represents state and local governments in an ongoing effort funded by around 25 states to change state tax laws to make them easier for retailers to implement.

"Using a street address and a ZIP code," Johnson said, "the software can calculate any sales tax in a fraction of a second."

“Quill dealt with phone and mail order based on a fact pattern from the 1980s, relying on court decisions from the 1960s,” says Utah Sen. Wayne A. Harper, who serves as a Utah delegate on the board.

In the streamlining process, state and local governments have whittled away many of the arcane definitions and conflicting tax codes that have long separated counties.

Today, 24 states, including Utah, have adopted tax laws that conform to the streamlined model. The proposed U.S. Senate bill would require states to adopt the streamlined model to be able to impose taxes under the new law.

The goal of the streamlined sales tax project is to eliminate the regulatory burden on online retailers now asked to collect the tax, while evening the playing field for retailers who already do.

An alliance

State governments and bricks-and-mortar retailers have forged an alliance in the sales tax wars. Since the 2009 recession, both have felt under siege, as the economic recovery and tax revenues lagged and online retail began taking a bigger slice of the retail pie.

In the three months of 2017, nine major retailers filed for bankruptcy — as many as in all of 2016. Payless Shoe Source also joined that list in April, and over Memorial Day weekend, Radio Shack closed over 1,000 stores. Other major retailers that have announced store closings this year include Macy's and Bebe department stores.

This month, the Wall Street firm Credit Suisse projected that by 2022, over one-quarter of American shopping malls will close. In this year alone, Credit Suisse predicts, 8,640 retail stores will close.

Bricks-and-mortar retailers don't see sales tax equalization as a silver bullet, but they do see it as a necessary first step to leveling the playing field.

"Not charging sales tax is simply an unfair price advantage, on top of advantages they already have, including economies of scale and lower overhead," said Craig Sherman, vice president for Government Affairs at the National Retail Association.

State and local governments feel their pain. Putting a precise number on how much revenue states lose to internet sales is difficult, NCSL's Behlke says, as online retail is constantly morphing.

In the most widely cited estimate, NCSL calculated that in 2012 state governments lost $23.3 billion in sales taxes to untaxed e-commerce. Today, Behlke said estimates of lost revenue range from $30-$90 billion.

In 2012, NCSL estimated Utah’s share of this 2012 loss at nearly $181 million. To put that in perspective, Utah in 2012 increased its hard-pressed public schools budget — one of the nation’s lowest on a per pupil basis — by just $117 million, much of which went to keep up with expanding grade school enrollment. So $181 million wasn’t chump change.

Massachusetts, a leading rebel state, which, as noted, has defined cookies and apps as physical presence, has been collecting sales tax from Amazon since November of 2013, when Amazon opened a software development operation there.

Parsing the impact of Amazon’s taxes then for the state's retailers is nearly impossible, says Bill Rennie, vice president with the Retailers Association of Massachusetts.

But measuring monetary impact is almost beside the point. “Our members continue to argue for a level playing field,” Rennie insists. “If we are going to have a sales tax it needs to be evenly applied regardless of the platform. A sale is a sale.”