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We're all tax-dodgers 

Not paying taxes on most online purchases? Yeah, we figured.

Dick and Judy Noyes opened the Chinook Bookshop in Colorado Springs in 1959. For decades, the store was a beloved flagship of downtown, but in 2004, it closed — the victim of competition from big-box stores and, increasingly, online retailers such as amazon.com.

State Sen. Michael Merrifield, D-Colorado Springs, remembers the Noyeses telling him that one of the challenges for the store was sales tax. People who purchased books online didn't have to pay it, and that put their independent business at a disadvantage. To Merrifield, that didn't seem right.

"Government has to treat all businesses fairly," he says, "and if we get a huge amount of business being done through the Internet, then we need to be able to collect a tax on it."

Actually, some online retailers do collect Colorado taxes, others send notifications of taxes due, while others do nothing. In the two latter cases, the state and city already have laws that say if you don't pay sales tax to a retailer, you're required to self-report and pay it directly to the government. It's called a use tax.

Never heard of the law?

Yeah, that's sort of the problem.

While it's difficult to measure just how ineffective this law is, it's safe to say it hasn't worked well.

Because of that, state lawmakers like Merrifield want the system changed. "Amazon laws," the shorthand label for laws that attempt to collect state sales taxes on online purchases, have been passed around the country, but have been met with resistance by some online retailers.

Basically, it's legally difficult to argue that an online store with no physical presence in a state has to abide by that state's laws. It's the same rationale that says you don't need to follow Colorado's traffic laws when you're in Arizona.

Nevertheless, Colorado passed a type of Amazon law in 2010. Merrifield, then a representative, co-sponsored House Bill 1193. The law made a couple of changes. First, it said that if a retail group (like Amazon) had any partners that had offices within the state, then in most cases the whole group was considered to have offices within the state, and must collect and remit sales tax.

Second, it required out-of-state online retailers that sold more than $100,000 worth of product in Colorado to notify the state once a year of the taxes due on purchases. The retailer was also supposed to send a notice to customers. The notices were intended to serve as reminders to customers, who were then expected to log on to the state website, fill out a form, and pay the taxes due.

The reporting requirement is currently in legal limbo following challenges from the Direct Marketing Association, a trade group. But even before the legal problems, state regulators say they have no statistics showing whether those notices were regularly being sent out or abided by. And even Merrifield admits adherence is unlikely. He says he knows many people shop online in part because they can avoid paying sales tax. And he doubts they're logging on to the state website to fork over those tax dollars.

"Not to be cynical," he says, "but I find it very doubtful."

Actually, it's probably pretty unlikely that most people even know that they owe the tax, though Colorado Department of Revenue staff notes via email that, "We use all our outbound information channels, which include a tax Weblog and an email subscription service to remind taxpayers of this obligation."

Though one study estimated that Colorado was shortchanged an estimated $170 million in uncollected taxes in 2012, DOR staff say they have no idea what Coloradans purchase online, and thus they don't know how much they're losing in sales tax revenue.

Since El Paso County isn't a home-rule entity, the state collects its sales tax and remits it back to the county, explains Dave Rose, county spokesperson. So when the state is cut short, so is the county.

The city is also due taxes on online purchases, but since it's home-rule, it collects those taxes separately from the state. The city requires citizens to pay it via a form at springsgov.com for all purchases of $100 or more. It audits businesses to ensure they pay the tax, but it doesn't do any similar checks with citizens. City spokesperson Kim Melchor says it's impossible to tell just how many individuals go online and pay the tax, but it's probably not many.

"The majority of use tax receipts are collected from businesses," she says. "Only a very small amount are actually filed by individuals."

Lack of compliance isn't the only problem with Amazon laws. Recently, the U.S. Supreme Court heard a case involving Colorado's reporting requirements. The issue was whether the Colorado law must be challenged in state or federal court. The justices ruled that federal courts can hear the challenges, disappointing Colorado lawmakers as well as those in other states.

The ruling could kill Colorado's law and bring on more challenges to similar laws. But it was a narrow decision by the court, and Justice Anthony Kennedy welcomed a broader case, hinting he may support the right of states to collect online sales tax.

To Merrifield, this seems predictable. It's the federal government, not the states, that he thinks will have to fix the problem. Congress considered bills addressing online tax in 2013 and 2014, but didn't pass them. Merrifield says that given the revenue that states are losing daily, Congress needs to try again.

"If you're driving around the Springs slamming into potholes," he says, "you know that we don't have the cash we need to cover our infrastructure needs."

  • Not paying taxes on most online purchases? Yeah, we figured.

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