AUSTIN, Texas • State budget crunches are forcing teacher layoffs, the closing of public libraries and parks and reducing health care services, but there is one place they could get $23 billion if they could only agree how to do it: Internet retailers such as Amazon.com.
That's enough to pay for the salaries of more than 46,000 teachers, according to the U.S. Bureau of Labor Statistics. In California, the amount of uncollected taxes from Amazon sales alone is roughly the same amount cut from child welfare services in the current state budget.
But collecting those taxes from major online retailers is difficult.
Internet retailers are required to collect sales tax only when they sell to customers living in a state in which the retailers have a physical presence, such as a store or office. When consumers order from out-of-state retailers, usually they are required under state law to pay the tax. But it's difficult to enforce and rarely happens.
That means that under the current system, the seller is absolved of responsibility, buyers save 3 percent to 9 percent because they rarely volunteer to pay the sales tax, and the state loses revenue.
With sales tax revenue slumping more than 30 percent in most states between 2007 and 2010, lawmakers across the country are grasping for ways to collect those unpaid taxes. Retailers and lawmakers in several states have proposed ways to solve the problem, some with more support than others.
"The problem is that some out-of-state e-retailers openly flaunt the law, arguing that it doesn't apply to them," said Texas state Democratic Rep. Elliot Naishtat, who has offered a bill to require more Internet sellers to collect Texas sales tax. "It's about potentially generating hundreds of millions of dollars for our state."
Internet retailers cite a 1992 U.S. Supreme Court decision involving catalog sales, Quill Corp. v. North Dakota, which ruled that states could require only companies that had a physical presence within the state to act as tax collector.
To get around the ruling, some states are expanding what it means to be physically present. For example, an online retailer hiring a marketing firm or owning a subsidiary inside the state would qualify under definitions adopted in some states.
In February, the Texas comptroller demanded that Amazon.com pay $269 million in back sales taxes because a subsidiary operated a warehouse near Dallas. Amazon is appealing the order.
Last year, New York enacted a law that said Internet retailers' practice of paying commissions to marketing agents based within the state constituted a presence. Arkansas, Colorado, Illinois, Rhode Island and North Carolina quickly followed with similar laws.
Illinois and Missouri shoppers have been required to pay a "use tax" on items they buy online or through a catalog in place of the state's regular sales tax. But the states long relied on taxpayers to self-report those purchases and pay the taxes — something few of those taxpayers do.
Before Illinois toughened its law earlier this year, the Illinois Department of Revenue said that just 5,000 to 6,000 Illinois taxpayers a year voluntarily pay the state sales tax on their online purchases, coughing up some $5 million to $6 million. The agency estimates it would collect more than $160 million if all Illinoisans paid the tax.
Residents of Missouri also have the responsibility of self-disclosure on use taxes. But they enjoy a tax-free exemption on the first $2,000 spent shopping online.
Amazon, Overstock.com and other big Internet retailers cite the Quill decision as their primary defense against collecting sales taxes, but they also argue that collecting tax in the District of Columbia and the 45 states where a sales tax exists would be extremely complex and expensive.
"There are over 8,000 taxing jurisdictions in the United States," said Jonathan Johnson, president of Overstock.com, which has offices only in Utah. "We think it's wrong that states are trying to cause out-of-state retailers to be their tax collectors."
After all, Johnson said, these retailers do not use any state services where they don't have offices.