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Online Sales Tax Revenue Fight Continues

The States are in financial trouble; there is no doubt about this fact. Tax revenues of all types for the most part are down, so States look for ways to increase revenue to make their bills. One issue that has been plaguing states for years are lost tax revenue on online sales. Goods are often cheaper to purchase online because there is often no sales tax to pay.

As the law is now, when you purchase something online, you are supposed to remit the applicable sales tax to your State's tax authority. Almost no one does this. Well the States are beginning to fight back and with their fight may come unintended consequences. If everyone had to pay sales taxes on online sales, then everything becomes more expensive immediately.

While it seems reasonable to require these online retailers to collect tax to help close the State budget gap, what are the potential consequences and what effect can they have? Recently, California passed a law requiring online retailers such as Amazon to collect and remit applicable sales taxes for sales that occur in that State if they have in-state affiliates. Amazon's solution: cut ties with local affiliates in the State's that have these laws.

So on to the unintended consequences.

If an online retailer cuts ties with a local affiliate, the customer purchasing the product will still purchase it however the product is likely to come from another state thereby skirting the tax collection requirement. Whatever the economic benefit the state affiliate had before is now lost. This means the State doesn't collect the revenue they were hoping to and the local affiliate now has less money to pay employees who in turn have less money to spend which has a negative impact on the local economy and makes the problem worse.

If the States want to fix this problem, they will have to be more creative.

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