Selling Online? Tax changes could drastically affect your bottom line
When you buy an item, say, a book at your local bookstore, the bookstore charges you a sales tax. However, if you were to buy that same book through an E-commerce business such as Amazon.com, you typically would not be charged a sales tax. Instead, the purchaser is supposed to report and remit to the state a use tax on that purchase. But most people don't even know this, and it's virtually impossible for taxing authorities to enforce the use tax against so many consumers.
Why does the local bookstore need to collect a sales tax, but Amazon does not? Interpreting the Constitution, the U.S. Supreme Court decided that a vendor cannot be required to collect or remit sales taxes unless that vendor has a physical presence (called "nexus") in the taxing state. Unlike the local bookstore, which has a physical presence (employees, inventory, etc.), remote sellers like Amazon do not have a physical presence in most states.
Impact on governments: E-commerce sales accounted for up to $12 billion of lost tax revenues in 2010 alone for the approximately 9,600 state and local governments that impose sales taxes. States have developed several responses which include stretching the meaning of "physical presence."
States' responses: In 2011, 22 states proposed legislation imposing sales tax collection responsibilities on remote sellers such as Amazon. Recently enacted (and proposed) legislation includes so-called "Amazon-affiliate" nexus laws in New York and other states. These laws attack agreements whereby in-state residents' websites or blogs refer customers to the remote seller's website. In return, the remote seller pays a commission. According to a few states' laws, such arrangements constitute doing business in the state by the remote seller, which is then obligated to collect and remit tax. There are pending court cases in New York and Illinois over the constitutionality of these laws.
Several states now require remote sellers to: (1) Notify their customers they must pay use tax; and (2) Report the sales details to the state. Colorado's law imposes hefty penalties for noncompliance. The Direct Marketing Association sued the State of Colorado. The court has not yet decided the case; however, it has temporarily issued an injunction preventing Colorado from enforcing the law against out-of-state companies that have no physical presence in the state.
Some states' laws presume that the remote seller has nexus if there is an in-state affiliate that advertises on its behalf, uses the same service marks, or owns or is owned by the in-state affiliate. Even before such laws were on the books in California, a court held that a Michigan-headquartered remote seller (an online retailer) was obligated to collect California use tax because of its interconnection with its related California bricks and mortar stores. Not only did the online retailer and the stores share the same name, but the stores allowed the customers of the online retailer to return books to the stores.
Recently, the Ohio Tax Commissioner affirmed L.L. Bean's liability under Ohio's Commercial Activity Tax ("CAT"). L.L. Bean is a catalog and internet company having no physical presence in Ohio. Under the CAT "bright line nexus" test, L.L. Bean was subject to tax because it had at least $500,000 gross receipts from Ohio sources. This case is being litigated.
Federal legislation: Proposed federal legislation intending to provide more uniformity and clarity includes: (1) The Main Street Fairness Act, requiring remote sellers to collect sales taxes in states that have adopted legislation simplifying their sales tax laws; (2) The Business Activity and Tax Simplification Act of 2011, defining "physical presence" that would subject a business to income and other business taxes (excluding sales and use taxes); and (3) The Digital Goods and Services Tax Fairness Act of 2011, regulating taxation of downloaded music, movies and online services, and specifying which jurisdiction(s) can tax the interstate sale of a digital good or service.
Conclusion: Recent tax changes can drastically affect business' bottom lines. It pays to be aware of developments and plan accordingly. See next page for some practical tips!