More and more consumers are buying all kinds of stuff online--over the internet from companies such as Amazon.  Many of these sales transactions occur without the payment of sales taxes, as the selling company likely has no physical presence in the state of the purchaser.   Many brick-and-mortar companies argued that they were at a disadvantage as they were forced to compel customers to pay more (often times 8% or more) to cover the state sales tax.  

Illinois estimated that it loses over $150 million in sales taxes every year because of out-of-state retailers do not remit sales tax on purchases to made by Illinois residents.  Ohio estimated that they could increase state tax revenue by over $200 million annually, if online retailers collected sales tax on sales to Ohio customers.  

To counteract the loss of sales revenue, some states began to impose/enforce a use tax on in-state purchasers.  Alabama added a use tax declaration to its individual income taxes.  It is doubtful, however, that the states recovered more than a very small percentage of its lost sales tax revenue by residents payments of use tax. 

Facing a shortfall of tax revenue, state governments began to aggressively pursue internet companies, such as Amazon.   States passed laws designed to compel internet companies to collect and remit sales tax, based on the locale of their customers.  These laws look to Amazon's and other internet companies' use of affiliates based in their state to establish the necessary physical nexus. As a result, Amazon which only collected sales tax from customers located in a few states, now collects sales tax from customers in 28 states.  That number will rise to 29 states on November 1st, as Alabama can be added to the list.  

Alabama will start collecting an 8 percent sales tax from its customers in Alabama on Nov. 1. The company will join dozens of online retailers which have started paying sales tax to the state of Alabama.   Amazon will constitute the largest online marketer to collect sales tax for the State of Alabama.  Consequently, as of November 1st, Alabama will likely be collecting sales tax on approximately 75% of internet sales.  In addition, other companies may soon follow Amazon's example.  

Some have estimated that the Alabama governments will enjoy an additional $160 million from sales taxes collected from online sales next year.  The state will receive 1/2 of the sales tax revenue, while counties and cities will split the other 1/2.  The additional funds are sorely needed as Medicaid costs escalate without revenue to pay for them.  

These additional sales taxes and a possible state lottery may ease the State's budget woes in the years ahead.  

Gene M. Bowman, Tax Attorney in Huntsville, Alabama