Sales Tax Changes - How will they affect online businesses?
Many changes are underway for sales tax of goods sold online. Sales tax for online business versus brick and mortar stores is a complex issue, and one that is only becoming more so.
The Streamlined Sales and Use Tax was created in 1999 (when the Internet was still fairly young) to streamline and simplify sales tax collection for businesses located and operating in different states. Local brick-and-mortar stores are subject to their state’s sales tax laws and must collect and pay taxes, while remote sellers (businesses that sell their products to customers in a state, using the Internet, mail order, or telephone, without having a physical presence in that state) don’t collect or pay taxes. Sales tax is a huge income generator for states, so this issue has been problematic to interpret and implement.
Over the years, of course, the Internet has grown considerably and retailers like Amazon and Overstock.com have changed the landscape of online sales. Amazon collects sales tax only in the five states where it has a physical presence (offices or distribution centers): Kansas, Kentucky, New York, North Dakota and Washington. In 1992, the Supreme Court ruled — in the Quill catalog case — that a state can compel companies to collect sales tax only if they have a physical presence in the state. Over the past couple of years, several states have enacted sales tax laws that expand the definition of physical presence to include affiliate partners. In response, Amazon has eliminated its affiliate programs in several states rather than begin to pay sales taxes.
The Main Street Fairness Act was introduced into Congress in July of this year. This bill would overrule the 1992 Quill ruling and enable the 21 states that have voluntarily adopted the Streamlined Sales and Use Tax Agreement to require large Internet and mail-order retailers to collect state and local sales taxes.
As of now, this ruling targets large Internet and mail-order retailers (“large” is not legally defined at this point but some sales threshold would be set, possibly thousands of dollars in annual sales or possibly millions in annual sales). But, a recent ruling in California may change the game for everyone. Amazon.com, Overstock.com and other e-commerce platforms that allow small businesses to sell on their sites as "affiliates," and are required to collect and remit sales taxes if an affiliate sells more than a certain dollar amount to residents of that state each year. Earlier this year, California imposed a $500,000 threshold on sales by California-based Amazon affiliates, and Amazon fought back by spending more than $5 million to launch a public referendum to stop California's Amazon tax law. Rather than face a law banning taxes on Internet sales, California negotiated a settlement with Amazon which was signed into law last week.
Under the terms of the settlement, Amazon and other online merchants are supposed to lobby Congress to find a national solution to the out-of-state Internet sales tax collection issue. If Congress fails to act on nationwide legislation by September 15, 2012, California's Amazon tax will kick back in.
What this means is that it is increasingly likely that a bill will pass making sales taxes required on Internet commerce and all interstate sales transactions.
So what should you do?
First of all, keep an eye on these developments. If the Main Street Fairness Act passes, it would require online sellers to collect sales taxes and distribute them to the state or municipality from which the purchase originates. Though it will affect only those states who have agreed to the Streamlined Sales and Use Tax Agreement, it’s only a matter of time before state-specific legislation is passed which affects every state. Passage of a nationwide bill would add enormous technical complexities to an already complex task—not only do different states each have their own sales tax rules, but cities as well as municipalities within cities could all have different sales tax rates. This change could have a potentially devastating impact on small businesses, so be aware of changes on the horizon and raise your voice about this issue.
The Streamlined Sales and Use Tax was created in 1999 (when the Internet was still fairly young) to streamline and simplify sales tax collection for businesses located and operating in different states. Local brick-and-mortar stores are subject to their state’s sales tax laws and must collect and pay taxes, while remote sellers (businesses that sell their products to customers in a state, using the Internet, mail order, or telephone, without having a physical presence in that state) don’t collect or pay taxes. Sales tax is a huge income generator for states, so this issue has been problematic to interpret and implement.
Over the years, of course, the Internet has grown considerably and retailers like Amazon and Overstock.com have changed the landscape of online sales. Amazon collects sales tax only in the five states where it has a physical presence (offices or distribution centers): Kansas, Kentucky, New York, North Dakota and Washington. In 1992, the Supreme Court ruled — in the Quill catalog case — that a state can compel companies to collect sales tax only if they have a physical presence in the state. Over the past couple of years, several states have enacted sales tax laws that expand the definition of physical presence to include affiliate partners. In response, Amazon has eliminated its affiliate programs in several states rather than begin to pay sales taxes.
The Main Street Fairness Act was introduced into Congress in July of this year. This bill would overrule the 1992 Quill ruling and enable the 21 states that have voluntarily adopted the Streamlined Sales and Use Tax Agreement to require large Internet and mail-order retailers to collect state and local sales taxes.
As of now, this ruling targets large Internet and mail-order retailers (“large” is not legally defined at this point but some sales threshold would be set, possibly thousands of dollars in annual sales or possibly millions in annual sales). But, a recent ruling in California may change the game for everyone. Amazon.com, Overstock.com and other e-commerce platforms that allow small businesses to sell on their sites as "affiliates," and are required to collect and remit sales taxes if an affiliate sells more than a certain dollar amount to residents of that state each year. Earlier this year, California imposed a $500,000 threshold on sales by California-based Amazon affiliates, and Amazon fought back by spending more than $5 million to launch a public referendum to stop California's Amazon tax law. Rather than face a law banning taxes on Internet sales, California negotiated a settlement with Amazon which was signed into law last week.
Under the terms of the settlement, Amazon and other online merchants are supposed to lobby Congress to find a national solution to the out-of-state Internet sales tax collection issue. If Congress fails to act on nationwide legislation by September 15, 2012, California's Amazon tax will kick back in.
What this means is that it is increasingly likely that a bill will pass making sales taxes required on Internet commerce and all interstate sales transactions.
So what should you do?
First of all, keep an eye on these developments. If the Main Street Fairness Act passes, it would require online sellers to collect sales taxes and distribute them to the state or municipality from which the purchase originates. Though it will affect only those states who have agreed to the Streamlined Sales and Use Tax Agreement, it’s only a matter of time before state-specific legislation is passed which affects every state. Passage of a nationwide bill would add enormous technical complexities to an already complex task—not only do different states each have their own sales tax rules, but cities as well as municipalities within cities could all have different sales tax rates. This change could have a potentially devastating impact on small businesses, so be aware of changes on the horizon and raise your voice about this issue.
