Now that California has passed a law to impose sales tax on Internet sales, we will to pay close attention to how we implement and the speed in which other States adopt similar laws.
Late last month, California became the most recent state to enact a bill mandating that out-of-state online retailers with affiliates in the state collect state sales tax.
Under federal law, states can tax sales only if the seller has a physical presence or “nexus” in the state. This generally means employees, property or equipment located in the state. This stems from Quill v. North Dakota, the Supreme Court case in 1992 that ruled catalog sales — “Quill” is the office supply catalog company — are not subject to sales tax unless the seller has a physical presence in the jurisdiction (states, municipalities and local taxing districts) imposing the tax. California (and other states) have redefined “physical presence” in the context of online businesses. The states are arguing that someone who has physical presence in a state that we pay a commission creates nexus for the online business. For example, if I was a California company and provide a link to Amazon to buy certain books which I receive a commission, Amazon would need to charge, collect and remit sales tax to California since I have “nexus” in the state. The California law defines the affiliates as agents of e-tailers, thereby establishing a nexus. California followed the approach taken by New York that, in 2008, passed a law requiring out-of-state retailers and e-tailers to pay New York taxes on the activities of their New York business associates who were classified as agents. Amazon challenged the constitutionality of the law — citing Quill — but a New York State court found that New York could tax these sales. Amazon decided to comply, kept its New York affiliates, and collects sales tax in New York, depositing the money in an escrow account, but the issue is still in the court system. However, Amazon has cut off affiliates in Arkansas, California, Connecticut, Hawaii, North Carolina, and Rhode Island, all states that have all enacted laws to collect sales tax from e-tailers.
Amazon and Overstock immediately responded by cutting off their affiliates in California. Amazon alone had an estimated 25,000 affiliates in California. Consequently, California, who had hoped to increase its tax revenue, has driven revenue (and arguably jobs) out of California. As this issue continues to gain momentum, we think the Federal government will need to intervene to gives us final resolution. Until then, we will need to comply with the state-by-state sales tax laws.
In many states, including Georgia where we are located, customers are supposed to declare their online purchases and pay the sales tax on their income tax forms. But most ignore this requirement and it is too costly for states to pursue those who do not comply. Since it is easier to target the business community, we believe States will continue to stretch the definition of “physical presence” to force more business to charge, collect and remit State level sales tax.
We will continue to monitor the developments to the Internet sales tax issue and assist our clients in navigating this complex area of law. If you have any questions regarding Internet Sales Tax, please do not hesitate to contact us.