How to Tax Internet Sales and Revenue? The Billion-Dollar Question States Are Asking.

AmazonAs states struggle to find more money for their budgets, many of them have looked to the Internet as a new source of funding. Since its inception as a retail outlet, the Internet has largely been governed by the rules of a 1992 Supreme Court Ruling that states that absent a nexus, online retailers and mail-order companies can sell products online without collecting sales tax.

Two issues from this ruling are fueling the fight. First, the thing we all must consider is that the 1992 ruling doesn’t allow for items to be sold tax-free. It only moves the burden of collecting tax from the selling companies and onto residents to report. Second is the definition of nexus: in the original ruling, nexus is defined as a physical location within the state.

The fight over nexus

 

 Today, many new laws are being written to change this definition and require Internet companies to collect sales tax and thus “level the playing field” with local and regional businesses that are required to collect sales tax.

 

The new fight over nexus in many cases is being driven by large retail operations that want to fight powerful eTailers like Amazon and create a fair price comparison online. The argument is being made (and supported in states such as New York, Rhode Island, North Carolina, and Illinois) that “affiliates” representing the website and advertising their wares on it are effectively “sales people” of the partner site, thus giving them nexus and requiring them to collect sales tax.  Although not limited to the online giant’s business, this fight has become known as the Amazon Affiliate Tax due to it being in large part about vendors who sell through Amazon and Amazon refusing to charge sales tax save for in states with physical Amazon locations such as corporate headquarters and fulfillment centers.

Currently, in all cases where a state has passed legislation requiring online sellers to charge sales tax, Amazon and other larger Internet retailers have cancelled their relationships with local affiliates because the eTailers refuse to collect the sales tax. With over 19 states with current laws on the books or in discussion, what does the future of the Internet tax look like and what does it mean in our industry specifically?

What does Internet tax mean for us?

The textbook world has been affected as much as any industry and the fight will only get bigger. Remember that Amazon is the biggest player in this scenario and that books were their foray into online selling and remain a bread-and-butter product. Because of the nature of a textbook rental, any company who rents books online physically owns that book while the users “borrow” it for the semester. The possession of ownership by the renting company gives it physical product within the state and thus a nexus for collecting sales tax. Therefore we see every rental company charging and collecting sales tax. My guess is that, given how Amazon is loathe to collect sales tax, this little fact will keep the online giant away from the rentals game for a while.

The truth is that all of this is posturing and we all must remember that the tax is still due whether it is collected by the retailer or paid by the individual. It’s simply that companies like Amazon don’t want to come off as the bad guy (And who doesn’t love Amazon because they don’t charge tax?) or deal with the accounting. Bottom line: the concept of a tax-free purchase on the Internet is based in falsehoods and it is unfair to sellers and buyers and businesses.

Internet tax initiatives by state
Here is a state by state break down of current tax initiatives. You can bet that the list will grow quickly as states try to raise revenue and online retailers do their best to avoid being the tax collectors.

Arkansas. In April 2011, Gov. Beebe signed a law imposing tax collection responsibilities on Internet retailers with Arkansas affiliates and more than $10,000 a year in sales from state residents. The law will go into effect in late summer.

California. In 2009, state lawmakers passed sales tax legislation, but the bill was vetoed. Recently, in reaction to pending legislation over the taxation of Internet purchases, Amazon threatened to sever ties with 10,000 California affiliates.

Colorado. In 2010, the state legislature passed a law requiring large online retailers either to collect sales tax or to provide the state with customer information. In response, Amazon closed its Colorado affiliates program. In January 2011, a federal judge effectively halted any income the state might receive from the law.

Connecticut. Legislation to impose Internet sales tax has been approved by the state’s legislative finance committee. The bill targets purchases shipped to Connecticut residents, if the online retailer has realized as little as $2,000 a year in sales from Connecticut-based referral sites. The bill now heads to the full state congress for debate, and possible passage.

Hawaii. In 2009, Amazon shut down its affiliates program as the state attempted to pass sales tax law. In March 2011, Hawaii lawmakers again introduced sales tax legislation, requiring online retailers with Hawaii affiliates either to collect sales tax or to provide the state with customer information.

Illinois. In March 2011, Gov. Quinn signed a law, called the Main Street Fairness Act, requiring any Internet retailer with Illinois affiliates to collect sales tax. The law applies to merchants with $10,000 in annual, statewide affiliate sales. Amazon closed its Illinois affiliates program.

Massachusetts. State lawmakers have introduced two bills imposing tax collection responsibilities on Internet retailers with state affiliates and more than $10,000 a year in sales from state residents.

Minnesota. In 2009, state lawmakers attempted to pass sales tax law for online retailers. In 2011, the governor recommended that affiliate nexus language be included in the proposed state budget. Lawmakers are considering online sales tax legislation.

Missouri. Two legislators have proposed joining the Streamlined Sales Tax Project to ensure that sales taxes are collected from online retailers. In addition, State lawmakers are considering replacing income tax with increased sales tax.

New Mexico. State lawmakers are considering a bill to establish affiliate nexus tax on online purchases.

New York. In 2008, New York passed a law requiring online retailers to collect sales tax on shipments to residents. Amazon challenged its legality, claiming the law was “invalid, illegal, and unconstitutional.” In January 2009, the lawsuit was tossed out of court. In November 2010, a New York appeals court reinstated the lawsuit, ruling 5-0 that the “dismissal of the entire complaint was premature.” Amazon continues to collect sales tax in the state.

North Carolina. In 2009, Amazon closed its affiliate program after the state enacted Internet sales tax legislation. In 2010, North Carolina demanded information on purchases made by state residents between 2003 and 2010. Amazon disclosed its own in-state sales information, but not customer-identity information. North Carolina took Amazon to court and lost.

Oklahoma. In 2010, the state enacted a sales tax law, requiring retailers who do not collect sales tax to provide notices to customers that sales taxes are due.

Rhode Island. In 2009, Amazon closed its affiliate program after the state enacted sales tax legislation establishing an affiliate nexus.

South Carolina. In April 2011, state legislators rejected a sales tax break for Amazon, which would have exempted Amazon from collecting sales taxes for five years if it provided at least 1,249 full-time jobs. In response, Amazon abandoned plans for opening a new distribution center.

South Dakota. In March 2011, the state enacted a sales tax law, similar to Oklahoma’s law, requiring retailers who do not collect sales tax to provide notices to customers that sales taxes are due.

Tennessee. Amazon has begun to hire for two distribution centers, after the previous governor’s administration promised Amazon would not have to collect sales tax based on the facilities. Current Governor Haslam has said he will honor the commitment.

Texas. In September 2010, Texas claimed Amazon owed $269 million in sales tax, after determining that a warehouse, owned by an Amazon subsidiary, established a physical presence in the state. In response, Amazon said it would close the facility and canceled plans to build another warehouse in the state. The Texas House has passed a bill to expand the definition of physical presence. The SEC is now looking into the dispute.

Vermont. In March 2011, the Vermont House passed a bill imposing tax collection responsibilities on Internet retailers with state affiliates and more than $10,000 a year in sales from state residents. The bill now moves to the Senate.

Comments (3)

  1. New York Tax 2011

    i like your question and answer for that. So thank you so much about sales tax.

    Reply
  2. Pingback: Amazon Enters Textbook Rental! This time renting physical books. «

  3. Ivan

    I was just charged a “Rental tax” at my school, on top of a “sales tax” for renting textbooks. Is that legal to pay double taxes for one item?

    Reply

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