My wife actually has had an online company, so I can speak from experience with reality. Until recently she collected taxes when she sold a retail product within our home state of Virginia. She paid those taxes to the state government using their forms on their schedule. A few months back the Supreme Court ruled that entities could demand that sales taxes be collected from ALL online sales, and that the seller would have to then transmit those collected taxes to the localities, using whatever mechanism, rules, limits the localities decided to implement. The court set no lower limit on the size of the business, leaving that to the localities. So now she would have to track not just the 50 states, but the localities within the states. For example, we live in Winchester, VA. The Virginia sales tax is 4.8%, but the city tacks on an additional 0.5%, so the total tax for a product sold to anyone living in the city is 5.3%. However, if that person lives in the surrounding county, where there is no sales tax, she should collect 4.8%. We live about 1 block from the city line, so two different neighbors would now be charged different rates, based on where THEY live. For simplicity, she just collected 5.3% from every sale in the state and let the state sort it all out. Out of state sales she did not collect any taxes, at least until the Supreme Court decision.
Now, however, she would have to track 100's, maybe 1000's, of locations (states, cities, counties, parishes, whatever) for what their tax rules are--what to collect, who to send it to, when to send it in, what paperwork to file, what registration she would have to do to send it in, etc, etc. And also track for any and all changes in any and all of those locations. And she would be liable for any failure to follow all of those rules in all of those locales, paying whatever penalties and fines they choose to establish because of that failure. It would be a nightmare for a small business like hers (one woman operation).
Iggibar was incorrect in saying, "To make this even WORSE, Amazon can claim these taxes against their "profits" effectively reducing their tax burden." That is not accurate. What actually happens is that the collected taxes are not considered a part of the profit because they are NOT part of the profit. They are taxes collected on behalf of the locality government. Amazon is just a tax collector. So when they file their income taxes as a business, they report revenue (that is, the money they collected, which is their sale price + sales tax), then remove the sales tax and pay income tax on the revenue - sales tax - cost of goods sold, as that is all they actually made as profit. That's very simplified, of course, as there are lots of other parts of calculating taxes owed on income. It would hugely unfair to ask a business to pay income taxes on sales taxes collected and turned over to the government as they are very definitely not part of income. It is not that Amazon is somehow avoiding paying income taxes by substituting sales taxes, it's that sales taxes are NOT part of income of Amazon because they are collecting it for the state. BTW, that is exactly the same for my wife's business. She collected taxes on behalf of Virginia, sent those funds to the state but did not pay income taxes on those sales taxes because she was just a collector.
Amazon, before the Supreme Court decision, collected and paid sales taxes in all states/localities where it had a physical presence. That was how the system worked as defined by law, previous court decisions, and IRS regulations. As Amazon moved distribution centers closer to the customer by creating more and more of them, they collected taxes in more and more states. So, using the $90 drill example, if they sold into a state where they had a physical presence, they would charge $90+sales tax, but if the sale was into a state that had no Amazon physical presence, they would charge $90. I know that is how it worked because when Amazon added a distribution center here in Virginia (about 15 miles from my home, in fact), they started to charge Virginia sales tax on all purchases we made to comply with state law. Prior to that distribution center, Amazon did not collect any sales tax from Virginia buyers, hence it didn't send any sales taxes to Virginia. It's not that Amazon avoided taxes, it is that it didn't collect any taxes by law and regulation. What way too many people don't understand is that businesses don't PAY taxes, they COLLECT taxes from buyers and send it to the states. By the way, if Home Depot sold you that drill online and did not have a store in your state, it, too, would not have had to collect sales taxes on that drill for that online sale. But HD has a lot of stores in just about every state, so they end up collecting and sending to the states those taxes.
Don't know if you noticed, but in discussing my wife's business, I used past tense. That's because the tax changes are driving her to get rid of it. The cost of paying for an accounting service to track all of the sales taxes in all of the locations in the US and Canada would be more than her profit last year. She can't really pass the cost on to customers as that would almost double the price, which would drive away customers, so she's just walking away. She won't be the only small business owner to do that.
What do I think should/could be done? Given that the Supreme Court mucked everything up, what would be good would be for the states to agree that each business should collect sales taxes on all sales based on where the BUSINESS is, not where the customer is. So if you buy from a business in Virginia, you pay Virginia taxes. If you buy from California, you pay California taxes. If a company has multiple outlets, like Amazon or Home Depot, you pay the taxes based on where the business has physical presence, so if I order from HD, I pay VA taxes and if I order from Amazon, because they have VA presence, I pay VA taxes. If I order from a company in California that has no physical presence in Virginia, I pay California taxes. In practical terms, if I order from OWC, in Illinois, I would pay Illinois tax, whatever that is. If I order from B&H in NYC, I pay NYC taxes. Will that make a difference in where I decide to buy? Sure, I'll pay the same price for products from lower tax locations if the shipping is equal. Bottom line, I look at the final price and how long it will take to get to me and pay whatever is minimally acceptable.
In addition to paying at the SELLER location tax rate, I think there should be a national business size minimum to collect sales taxes. Base it on retail sales since that is where sales taxes are collected. it doesn't have to be high, maybe annual revenue of $50,000 or more, but for a really small business it takes a long time to file the forms the states require because they want to know a lot of data about how you calculated the amount you are sending in. It's not just "what did you collect" but what was revenue you sold, what was in-locality and what was not and other details about the revenue and taxes collected that you are reporting. For my wife, it took hours to fill in the forms. So let a really small business have a break. The states won't go broke with that little bit of tax not coming in.