Responsibility to Collect and Pay Sales Taxes
Technically, if an Internet “etailer” does not collect the state sales tax for an online purchase (in a state that has a sales tax), the individual making the purchase should pay the tax to the state. In these cases, the state calls this a “use tax,” when paid directly to the state by the buyer, rather than the seller.

States have generally avoided pursuing collection of sales or use taxes on small purchases, such as books, focusing instead on “big-ticket” items, such as automobiles. However, because of the increasing volume of online transactions, states have become more aggressive in collecting these sales and use taxes for online purchases. While some states have initiated information campaigns to explain the rules for online purchases to local taxpayers, other states are taking a hard line on collecting sales and use taxes. New York state is a case in point. New York has now included a line on their income tax forms requiring residents to determine their tax liability on all Internet, mail order and other out-of-state purchases. The state has also actively pursued collection of these taxes from large etailers, including Amazon and Overstock.com.

Affiliate Nexus
If a retailer has a physical presence in a state, such as a store, office or warehouse, it generally must collect applicable state and local sales taxes from its customers. However, the converse is also true: if there is not a physical presence in a given state, the retailer is usually not required to collect sales taxes. The physical presence is called a “nexus” in legal terminology, though the definition may differ slightly from state-to-state.

The “nexus” rule is based on the 1992 Quill v. North Dakota [504 U.S. 298, (1992)] case, in which the Supreme Court decided that states cannot require mail-order businesses, and by extension etailers, to collect sales tax unless the seller has a physical presence in-state. The ruling was partly based on the fact that there are over 7,500 tax jurisdictions in the US, including states, counties and municipalities, that charge sales taxes. Requiring out-of-state sellers to comply with the multitude of tax rules was deemed too burdensome and a potential damper on interstate commerce.

As noted above, some states (including New York) have become more aggressive in assessing sales taxes on mail order, online and other out-of-state purchases, so etailers must know the applicable tax rates, as well as any exemptions in place. Given the complexity of the various tax rates and rules, as well as the importance of correctly calculating the taxes due, firms should consult their CPAs, professional tax preparers and business advisors to ensure their compliance.

How New York Changed the Game
New York began charging etailers sales tax on shipments into the state last year. As outlined, firms generally should only collect sales taxes on purchases in states where they have a physical presence. However, New York state took the very aggressive position that etailers’ in-state affiliates (websites that refer customers, then earn commissions on the subsequent sales), constitute a “presence” or nexus in New York state. Therefore, the state took the stance that the etailers had to collect the state sales tax on purchases by New York residents.

Amazon, the largest etailer in the US, began collecting sales tax on shipments into New York in accordance with the change, while Overstock.com simply ended its affiliate relationships in the state. Both firms filed lawsuits against the state’s redefining affiliate websites as an in-state presence, arguing that such affiliates are simply advertising. The state Supreme Court has initially ruled in the state’s favor, but the decision is likely to be appealed. In the interim, Amazon will comply and collect sales tax on purchases by New York state residents.

Complicating the legal issues further is that five states have no sales tax, so are not affected, while other states that do not charge a state income tax rely heavily on sales taxes to fund the state government. Therefore, those states are impacted more by losses of sales tax revenues due to mail order, online and other out-of-state purchases, though there are no hard numbers on the actual, total volume of these sales per state.

Streamlined Sales & Use Tax Project
While the Supreme Court decision in Quill vs. North Dakota determined that complying with the myriad of existing tax regimes was too complicated for firms without a physical presence in the specific state, the ruling did provide Congress power to allow states to assess taxes on remote (mail order, online and other out-of-state) sellers.

In addition, the Internet Tax Non-Discrimination Act [Pub.L. 108-435 (2004)] extended the moratorium on new and “discriminatory” taxes on Internet purchases, as well as continuing the prohibition on local and state assessment of “Internet access taxes.” This law was based on a study conducted by the “Advisory Commission on Electronic Commerce,” sponsored by Congress, in 1999-2000. The final report opposed any taxes on e-commerce (Internet sales) and eliminated federal telephone taxes, as well as promoting other pro-business ideas. In late 2007, the “Internet Tax Freedom Act Amendments of 2007” were enacted extending until 2014 the original bans on ecommerce taxes (ref: 47 US Code Section 151).

In response to these rulings and enactments, a number of states initiated the Streamlined Sales & Use Tax Agreement (SSUTA) to resolve the overly complex state sales tax systems, alleviating a major component of the Supreme Court argument against collecting the sales taxes on mail order, online and other out-of-state purchases. Collecting state and local sales taxes is voluntary under the SSUTA, but it is deemed as a necessary interim step to enactment of comprehensive federal legislation that would authorize states to require collection of the state sales taxes on etailers and other out-of-state sellers.

To significantly simplify and lessen the compliance burden on remote sellers, the SSUTA is focused on the improving the following elements of the overall tax administration systems for all forms of commerce, including traditional “bricks and mortar” retailers and remote sellers:

1. State level administration of sales and use tax collections.
2. Uniformity in the state and local tax bases.
3. Uniformity of major tax base definitions.
4. Central, electronic registration system for all member states.
5. Simplification of state and local tax rates.
6. Uniform sourcing rules for all taxable transactions.
7. Simplified administration of exemptions.
8. Simplified tax returns.
9. Simplification of tax remittances.
10. Protection of consumer privacy.

Forty states and the District of Columbia are committed to the SSUTA and a number of national retailers with significant online sales are negotiating with states for past-tax amnesty in return for future collection compliance. Therefore, it seems likely that most remote purchases will be assessed sales or use taxes in the near future, especially with the financial pressure states are under to generate revenues.

Another proponent of the SSUTA is the e-Fairness Coalition representing the retail and real estate industries, including bricks-and-mortar and online retailers, retail corporations and associations, publicly- and privately-owned shopping centers, outlet centers and independently owned shops. The Coalition advocates and supports a “level playing field” that treats buyers “fairly” anywhere they shop, whether online or at traditional stores. Their view is that the current tax treatments give remote sellers a distinct advantage over traditional stores, while depriving states of their fair and much needed share of tax revenues.

Because of the complexity of complying with current tax regulations and the changing tax landscape, firms should consult with their CPAs, professional tax preparers and business advisors on the latest status of sales and use tax collections in states to which they ship product and sell their services.

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