I-Team: Which side of the river pays no tax?

HEBRON, Ky. - How would you like to save a couple hundred dollars on a flat screen TV? They'll even deliver it right to your door.

What's the catch? Collectively, Internet shopping will rob Ohio and its counties of $350 million in taxes this year.

According to Ohio Tax Commissioner Richard Levin, "Hamilton County alone is probably losing $5 million to $6 million in annual sales and use taxes that they could be spending for sheriffs or law enforcement."

That's enough to fill the entire hole in Hamilton County's 2011 budget.

Amazon.com is the biggest online retailer in the United States. The company has a massive warehouse in Hebron, Kentucky. That physical presence in the Commonwealth is what the U.S. Supreme Court calls a "nexus" -- the link that requires Amazon to collect sales taxes on purchases shipped to Kentucky addresses.

Big savings

Northern Kentucky residents have avoided the tax by having their big-ticket purchases from Amazon.com shipped to friends or to their workplaces in Cincinnati. Once those purchases cross the Ohio River from Kentucky, the sales tax disappears from the bill. It's as if Cincinnati's 6.5 percent tax doesn't even exist.

For an Apple laptop costing $2,059, the savings is $123 in Ohio versus Kentucky. But this practice is actually illegal if you don't eventually pay the tax.

University of Cincinnati Law Professor Paul Caron says, "if there's no sales tax imposed, and collected by the retailer, the individual is supposed to pay that tax on their tax return at the end of the year."

There's a special box on the state tax return in Ohio where taxpayers are supposed to report unpaid sales and use taxes. But 99 percent of Ohio taxpayers enter all zeros in that box, leaving few in compliance.

"It's a very tiny number," says the tax commissioner. "Less than 1 percent of Ohio taxpayers voluntarily report sales tax that they owe, but which they haven't paid to the retailer."

Caron adds, "everyone knows that this is not a tax that's enforced. People look at it as something that they don't have to pay."

And Amazon likes it that way. The tax issue gives the online retailer a huge advantage over "bricks and mortar" stores which have to collect sales taxes. Why buy from a local store when Amazon.com is like a giant duty-free shop?

The tax commissioner has received many complaint letters from small business owners in Ohio who can't compete with online retailers because of the tax inequity.

One letter was from an Ohio carpet store owner. "He said somebody came in. They took a sample of carpet home. They liked it. They came back and they said 'this is just what I want. Thanks. I'm going to go buy it on the Internet so I don't have to pay tax.'"

What can be done?

So why wouldn't the state legislature just pass a law forcing Amazon and other online retailers to collect sales tax? The reason is the U.S. Supreme Court ruled states can not force retailers without a physical presence in those states to collect tax from their customers.

But that doesn't mean some states haven't tried.

New York passed a so-called "Amazon tax" and has collected $70 million in new tax revenue. New York figured the affiliated websites in New York that promote Amazon.com give the company a "nexus" in the state.

But Amazon is suing the State of New York in federal court, and the company also responded by firing all the small businesses in New York that it used to promote on its website.

Colorado passed a law requiring Amazon to send letters to its customers at the end of the year informing them of their tax burden. Again, Amazon responded by firing affiliates in Colorado, hurting small business owners.

So far the Colorado law has resulted in zero new tax dollars.

Amazon.com refused our requests to tour the Hebron facility and to talk about the many benefits Northern Kentucky enjoys, such as jobs and taxes provided by Amazon. The company recently advertised 4,000 new job openings in our area, employing people on both sides of the river.

Meanwhile, Commissioner Levin has joined forces with dozens of other state officials to lobby Congress. "The bottom line here is to fix this problem we need a federal law change," says Levin. "We're not going to fix it at the state level."