Amazon, Internet Sales Draw Covetous Looks From State Tax Collectors

NEWS ANALYSIS: A number of states are considering new ways to tax music, video, ebooks and other digital downloads even for people who buy online and don't live in those states.

Imagine for a minute that you're about to buy a Kindle ebook from Amazon. Yes, I know that it's not much of a stretch, since there's a high likelihood that you have actually done this or purchased some other personal electronic product online. Or perhaps you've downloaded some music from iTunes or a movie from Netflix. Chances are, you didn't pay any sales tax on the stuff you bought.

Likewise, imagine you're buying a computer from HP. You'll likely pay a state sales tax to the state where you reside, but you won't pay a sales tax to California where HP is headquartered unless you live in California.

So you know how sales taxes currently work€”you either pay tax on the item where you are when you buy it, or where you live if you have it shipped home, even if you happen to be in, say, Hawaii on vacation when you placed the order for that HP computer.

But now let's suppose that the state of Washington decides it wants to charge sales tax on the Kindle book you just bought from Amazon as does the state where you live. And then let's suppose that another state, perhaps Illinois, wants to charge sales tax because that's where the Amazon server is located that delivered the book to you. Then suppose that Virginia decides to charge a sales tax because the electronic transmission for your book passed through Virginia (about 70 percent of the world's Internet traffic passes through Virginia).

So let's say that each of those states wanted to charge you a 5 percent sales tax on that ebook. For a $10 book that's 50 cents per book, meaning your $10 book just cost $12. This sounds pretty bad, but it is, in fact, being considered by several states. There is a law that's been working its way through Congress that would prohibit this practice: the Digital Goods and Services Tax Fairness Act (H.R.1860), which would make it federal law that you could be taxed only where you live for your purchase on the Internet.

In other words, just because Amazon is located in Washington, that state couldn't also tax the transaction. And right now they don't. But that doesn't mean that the state of Washington doesn't want to. In fact, the state of Washington has been studying ways in which it can do just that. So have several other states.

In one sense it's understandable. States are in a money crunch, and they see a lucrative new source of revenue. So, you may ask yourself, why isn't the state of Washington already taxing those books or kitchen gadgets you buy from Amazon? The reason is that they can't. The U.S. Constitution prohibits it. If you buy something from Amazon, you may owe that tax to the state where you were when you bought the products, but not to Washington.