The Amazon Sales Tax Loophole

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On Saturday, Amazon.com began collecting sales taxes for the first time on Internet purchases made by California residents. The move, which Amazon battled for years, represented a major victory for brick-and-mortar retailers, particularly small, independent stores who correctly argued that Amazon’s sales-tax exemption had awarded the online giant an unfair competitive advantage. However, there’s a large loophole in the sales-tax deal that is allowing a substantial portion of products sold on Amazon.com to remain tax-free.

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The Sacramento Bee reported that Amazon.com is not charging sales tax on items offered on its site by third-party sellers — the thousands of large and small retailers that use Amazon.com to market their goods. These third-party goods reportedly represent about 40 percent of the products sold on Amazon. As a result, many of the items will remain sales-tax free, meaning that Amazon.com will still maintain a competitive advantage over brick-and-mortar retailers on those products.

Amazon maintains that the big loophole is perfectly legal, and both the administration of Governor Jerry Brown and the California Retailers Association agree. “We couldn’t attain perfect,” Bill Dombrowski, president of the association, told the Bee, referring the deal that the state struck with Amazon.

To close the loophole completely, retailers are working on a national bill — but that likely won’t have much chance of passing as long as Republicans control the US House of Representatives. Still, even with the loophole, the state expects the new Amazon.com sales tax will generate about $158 million a year. That’s good news, but Brown, legislative Democrats, and the California Retailers Association should have fully disclosed the loophole when they trumpeted the Amazon deal last year.

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