Practical Ecommerce

Internet Sales Tax: Year-End Status

It’s the end of 2010 and the status of sales tax on the Internet remains somewhat the same since the U.S. Supreme Court ruled in 1992. States continue to push to try to gain access to growing sales transactions that occur on the Internet, and large ecommerce retailers continue to push back. In 1992, the U.S. Supreme Court ruled — in the Quill case — that a retailer is only liable for sales tax if they have a physical presence in a particular state. This is called “nexus.” This rule was based on the Supreme Court’s perception that compliance by the retailer would be too burdensome on interstate commerce because of differing tax codes among the states.

Congress Tries to Simplify

In July of this year, legislation was proposed in Congress that would allow states to require the collection of sales and use taxes if they entered into a multi-state compact called Streamlined Sales and Use Tax Agreement. This compact is meant to lessen the burden on interstate commerce by simplifying tax codes among the states, which the states hope will be the key to getting the legislation past. The proposed legislation is called the “Main Street Fairness Act.” Currently there has not been any action on this legislation by Congress.

New York Focuses on Affiliates

Legislation in Congress on this issue has been difficult to get passed. Therefore, states have tried other avenues to try to collect tax on Internet sales. States have tried to change the definition of “nexus” in order to try to capture sales tax from purely Internet based companies. In 2008, New York extended its definition of nexus to reach certain ecommerce retailers. Its focus was on major retailers, such as Amazon and eBay. The New York legislation states that online retailers must collect sales tax if they have sales affiliates in the state that generate a combined total of $10,000 or more per year in revenue to the retailer. Sales affiliates are defined to include individuals or organizations that are paid to link to the online retailer.

Amazon and Overstock.com sued the State of New York arguing that the law is unconstitutional because it violates the Constitution’s “Commerce Clause” (which permits the federal government — not states — to regulate commerce “between the states”) and due process. The lower court dismissed the case and just recently a New York State Appellate Court ruled on that case. The Appellate Court stated that the law does not violate the Commerce Clause or due process. However, other claims that were dismissed by the lower court were revived and the case was allowed to continue. The case has been sent back to the lower court for further review based on additional evidence not originally presented.

Many states are following New York and enacting their own version of the New York statute or other laws to try to cash in on Internet sales. Although many states already require the consumer who purchases from the Internet to pay “use” taxes for the use of the personal property in their state, reporting of such purchases by consumers is very low. Also, the cost of enforcement to collect the use tax by a state is simply too high for many states to try to capture this income on a mass scale. Therefore, states continue to look for avenues to try to collect taxes from the retailer.

Colorado Says Retailers Must Notify Customers

Colorado is taking a different approach. Legislators in that state are trying to require retailers to provide information to customers about paying Colorado use tax. This law requires Internet retailers that do not collect sales tax to notify Colorado customers that they owe tax on their purchase. This requirement is only for retailers that have more than $100,000 in annual sales. Other states have put in place provisions that require their governing entities (state and local governments) to only purchase from retailers that collect sales taxes.

Scan of postcard, enclosed in a shipment from an ecommerce merchant, to a Colorado resident.

Scan of postcard, enclosed in a shipment from an ecommerce merchant, to a Colorado resident.

Summary

As state budgets feel the pinch of less revenue coming in, we will continue to see the states and the federal government try to figure out a way to tax out of state sellers on sales. States that have not already enacted laws like New York’s are following the Amazon and Overstock.com case to see how they might be able to take advantage of similar statutes. At some point a national act, such as the Main Street Fairness Act, may be less burdensome on retailers than trying to comply with each state’s’ individual laws. Going into 2011, ecommerce retailers will need to continue to watch what each state is doing so they can maintain compliance with creative laws that may get passed in each state.

Jeff Jacobson, Jd, Llm

Jeff Jacobson, Jd, Llm

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  1. BeatriceV December 23, 2010 Reply

    Thank you for the informative article. As you point out, the 1992 Quill case established that a retailer does not have to collect sales tax for states in which it does not have nexus, based on the argument that it would be an unreasonable burden to do so. Much has changed since that time however. Technology makes it easy for anyone to open a Web business, manage inventories, use target marketing, calculate shipping etc. Technology has solved this problem also. My company, FedTax.net, offers a service (called TaxCloud) that enables merchants to accurately calculate local sales tax. The service is completely free to merchants.

    It is better that Congress address this issue so that all businesses collect the correct tax. Until then, more and more states are going to be attempting on their own to collect these taxes, which will 1) Add complexity as each state takes a different approach, 2) raise privacy concerns and 3) raise more fairness issues since not all consumers will be contacted to pay up.

  2. Matt Winn December 27, 2010 Reply

    This is a great article – thank you for succinctly wrapping up this important issue for 2010.

    Here in Texas, lawmakers are already making a move, especially after the state comptroller announced that The Lone Star State was losing over $600 million a year in uncollected online taxes.

    Back in October, the Texas state government sent Amazon a $269 million bill to gather tax monies that weren’t collected on online orders coming from Texas. Going along with the idea of nexus from the Quill case, Amazon has a distribution center in Dallas, which led the government to sending this bill. Amazon says the request has "no merit," and it’s still being tussled around in the legal system.

    Thus, pay special attention to states like Texas and Nevada that don’t collect a state income tax – these states are more likely than others to swiftly act on an online sales tax.

    Wondering how a sweeping sales tax reform might affect your online business? Check out this article on VentureBeat’s blog, "5 Ways an Internet Sales Tax Will Affect Your Online Business."

    http://venturebeat.com/2010/12/22/5-ways-an-internet-sales-tax-will-impact-your-business/

  3. Pesach December 30, 2010 Reply

    Clarification request please. In the paragraph relating to Colorado, "This requirement is only for retailers that have more than $100,000 in annual sales."
    Is the $100K total national sales, or sales to Colorado shipping addresses only?

  4. jajacobson December 30, 2010 Reply

    The total annual sales is limited to sales in Colorado, not nationally. Thanks for your question.

    Jeff Jacobson

  5. jeffbass December 31, 2010 Reply

    thanks for the article, jeff. i have a yahoo small business store and here is what they recently started posting on one of our signon screens:

    " Recent changes to sales tax rules in Texas may require ecommerce merchants using a server located in Texas to collect tax on sales made to customers in Texas. Merchants are advised that Yahoo! Small Business uses servers located in Texas. Merchants who accept orders from customers in Texas should consult with their own tax professional to determine if the new tax rules apply to their business, and for questions regarding tax obligations. For background information, please see our help page"

    do you have any info regarding this?? i would have loved for yahoo to be my advocate and tell texas that they are removing all servers from that state, but that hasn’t happened that i know of!! i’m not holding my breath!