Internet Sales Tax: States Take the Lead

The days of sales-tax-free online buying are coming to an end for many customers. 2012 was a year of inaction on the national level since the Marketplace Fairness Act that would have required sales tax collection from Web merchants on a national level never came to a vote. However states were active in passing legislation to collect sales tax revenue from Internet sales.

While Amazon was a strong supporter of the national laws — see “Amazon Becomes a Proponent of Internet Sales Tax,” my previous post — eBay and Overstock.com opposed it. The legislation hasn’t yet been reintroduced in the current Congress but Senator Lamar Alexander of Tennessee has announced plans to do so. Amazon recently retained a lobbyist to spur Congress to act on the legislation. It appears that the largest Internet merchant is growing tired of negotiating state-by-state agreements regarding sales tax group. Meanwhile, in the absence of a federal law, many states are thinking of the collection of sales tax on Internet sales because they need the additional revenue to balance budgets. More states are attempting to collect online sales tax only on the grounds of having Amazon affiliates in their geographic boundaries, despite the fact that this is of questionable legality.

Amazon’s Tactics

As I wrote in “California Joins the Internet Sales Tax Fray; Federal Legislation Coming,” Amazon would finish its affiliate relationships in any nation that established a nexus, or physical existence, based solely on affiliates dwelling in the state. However, now that 11 countries have affiliate laws — such as the three biggest states — and more states are considering one, that position is now untenable.
Amazon’s strategy is to negotiate with countries that pass Internet tax legislation, delaying tax collection in exchange for building warehouses and creating projects. As an example, Georgia passed a law requiring Internet sales tax collection on January 1, 2013 based solely on affiliate existence in the nation but Amazon never collected the tax. Instead it’s negotiating with the country to deliver a supply centre to Georgia.

More States Requiring Collection

Amazon collects sales tax in Kentucky since it’s distribution centers there. In 2012, Amazon began collecting sales tax in three quite populous states — California, Pennsylvania, and Texas. According to the Census Bureau, Amazon is currently collecting sales tax in states representing 35 percent of U.S. consumers.

Amazon will start collecting sales tax in New Jersey that July, in Virginia in September, in Massachusetts in November, in Nevada and Tennessee in January 2014, and in South Carolina in January 2017. These nations have negotiated for jobs and capital investment in exchange for putting off tax collection.

The business has agreed to begin collecting sales tax from Connecticut customers in November of 2013. Furthermore, Amazon will invest $50 million over two years to make a customer satisfaction center there. In Indiana, Amazon had negotiated a deal to begin collecting tax beginning in 2014, however, the Indiana House of Representatives recently passed a bill to move up the date to July 1, 2013. The bill will need to pass the Indiana Senate as well. Florida will occupy a bill to impose its six percent sales tax on online merchants this year. The Michigan legislature is also currently grappling with this problem.

Amazon decided to collect sales tax in New York rather than cut its affiliates there. However, it sued the nation and before this month argued in the New York Court of Appeals that having affiliates at the nation doesn’t constitute a nexus and the 2008 law requiring firms with affiliates to collect sales tax is unconstitutional.

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Other nations with affiliate laws are Arkansas, Illinois, North Carolina, Rhode Island, Utah, and Vermont. In such states, Internet merchants who rely on the affiliate model must collect sales tax.

Countries that had Internet sales tax legislation introduced but not passed in 2012 are Arizona, Iowa, Minnesota, Missouri, and Oklahoma.

Other Legislation

Senator Kelly Ayotte of New Hampshire introduced legislation in January to permanently extend the current ban on Internet access taxes. The Permanent Internet Tax Freedom Act would prevent state or local governments from imposing new taxes on Internet access or ecommerce. The Internet Tax Freedom Act, originally enacted in 1998, was created to make sure that multiple jurisdictions couldn’t tax the same transaction. Congress has extended the action multiple times but it is scheduled to expire in November 2014.

It’s hard to say which way Congress is leaning. If the ban were continued, it would probably not influence individually negotiated arrangements between Amazon and countries. But smaller ecommerce websites would stay exempt from sale tax group.