Practical Ecommerce

Internet Sales Tax: States Take the Lead

The days of sales-tax-free online purchasing are coming to an end for many consumers. 2012 was a year of inaction on the federal level because the Marketplace Fairness Act that would have required sales tax collection by Internet merchants on a national level never came to a vote. However states were energetic in passing legislation to collect sales tax revenue from Internet sales.

While Amazon was a strong supporter of the federal legislation — see “Amazon Becomes a Proponent of Internet Sales Tax,” my previous article — eBay and Overstock.com opposed it. The legislation has not yet been reintroduced in the current Congress but Senator Lamar Alexander of Tennessee has announced plans to do so. Amazon recently retained a lobbyist to spur Congress to act on the legislation. It appears that the biggest Internet merchant is growing weary of negotiating state-by-state agreements regarding sales tax collection. Meanwhile, in the absence of a federal law, many states are considering the collection of sales tax on Internet sales because they need the extra revenue to balance budgets. More states are trying to collect online sales tax solely on the basis of having Amazon affiliates within their geographic boundaries, even though this is of questionable legality.

Amazon’s Tactics

As I wrote in “California Joins the Internet Sales Tax Fray; Federal Legislation Coming,” Amazon would end its affiliate relationships in any state that established a nexus, or physical presence, based solely on affiliates living in the state. But now that 11 states have affiliate laws — including the three largest states — and more states are considering one, that position has become untenable.
Amazon’s tactic has been to negotiate with states that pass Internet tax laws, delaying tax collection in exchange for building warehouses and creating jobs. For instance, Georgia passed a law requiring Internet sales tax collection on January 1, 2013 based solely on affiliate presence in the state but Amazon never collected the tax. Instead it is negotiating with the state to bring a distribution center to Georgia.

More States Requiring Collection

Amazon collects sales tax in Kentucky because it has distribution centers there. In 2012, Amazon started collecting sales tax in three very populous states — California, Pennsylvania, and Texas. According to the Census Bureau, Amazon is now collecting sales tax in states representing 35 percent of all U.S. consumers.

Amazon will start collecting sales tax in New Jersey this July, in Virginia in September, in Massachusetts in November, in Nevada and Tennessee in January 2014, and in South Carolina in January 2017. These states have negotiated for jobs and capital investment in exchange for putting off tax collection.

The company has agreed to start collecting sales tax from Connecticut consumers in November of 2013. Additionally, Amazon will invest $50 million over two years to create a customer fulfillment center there. In Indiana, Amazon had negotiated a deal to start collecting tax starting in 2014, but the Indiana House of Representatives recently passed a bill to move up the date to July 1, 2013. The bill will have to pass the Indiana Senate as well. Florida will take up a bill to impose its six percent sales tax on online merchants this year. The Michigan legislature is also currently grappling with the issue.

Amazon decided to collect sales tax in New York rather than cut off its affiliates there. But it sued the state and earlier this month argued in the New York Court of Appeals that having affiliates in the state does not constitute a nexus and that the 2008 law requiring companies with affiliates to collect sales tax is unconstitutional.

Other states with affiliate laws are Arkansas, Illinois, North Carolina, Rhode Island, Utah, and Vermont. In these states, Internet merchants who rely on the affiliate model must collect sales tax.

States that had Internet sales tax legislation introduced but not passed in 2012 are Arizona, Iowa, Minnesota, Missouri, and Oklahoma.

Other Legislation

Senator Kelly Ayotte of New Hampshire introduced legislation in January to permanently extend the current ban on Internet access taxes. The Permanent Internet Tax Freedom Act would prevent state or local governments from imposing new taxes on Internet access or ecommerce. The Internet Tax Freedom Act, originally enacted in 1998, was designed to ensure that multiple jurisdictions could not tax the same transaction. Congress has extended the act multiple times but it is scheduled to expire in November 2014.

It is difficult to say which way Congress is leaning. If the ban were continued, it would probably not affect individually negotiated agreements between Amazon and states. But smaller ecommerce sites would remain exempt from sale tax collection.

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Marcia Kaplan
Marcia Kaplan
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Comments ( 3 )

  1. Marcia Kaplan February 15, 2013 Reply

    An update:

    On February 14, 53 U.S. senators and representatives joined in introducing the Marketplace Fairness Act of 2013. Main sponsors are: Senators Mike Enzi (R-WY), Dick Durbin (D-IL) and Lamar Alexander (R-TN), and Representatives Steve Womack (R-AR), Jackie Speier (D-CA) and John Conyers Jr. (D-MI).

    The bills reconcile differences in legislation that the House of Representatives and Senate considered last year. The new bill applies only to retailers whose online sales outside of their home state exceed $1 million annually. Last year’s bill provided for an exemption of only $500,000.

    In response to the bill’s introduction, Paul Misener, Amazon’s VP for global public policy, wrote a letter to the Senate sponsors saying, “I am writing to thank you for your bill, which will allow states with simplified rules to require sales tax collection by out-of-state sellers who choose to make sales to in-state buyers.”

  2. R David L Campbell March 15, 2013 Reply

    Clarification:

    ITFA is a ban/moratorium on internet access taxes, and on multiple discriminatory taxes on e-commerce.

    ITFA has NEVER exempted items purchased over the Internet from sales tax – all online purchases are subject to the same state and local sales taxes as non-Internet sales and mail order sales.

    ITFA did not repeal or prevent any state sales or use tax.

  3. James Moore March 21, 2013 Reply

    How does this affect Canadian businesses selling downloadable digital products in the USA? What are the US tax implications for them? Are they subject to paying any state or federal tax in the US?

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