Back in the day, nobody expected retail sales online would ever amount to much, so the laws were lax. We all know that’s not how it has turned out. Today, many states are very eager to get their hands on tax revenues for online sales.
In 1992 the U.S. Supreme Court ruled in the Quill v. North Dakota case, that only sellers with a physical presence (or nexus) within a state were required to collect that state’s sales taxes. Now the term “nexus” has been expanded (more thoroughly defined) to go beyond the original interpretation. And, in 2010, Arkansas passed what’s known as the “Amazon tax.”
According to Wikipedia the Amazon tax “refers to laws passed in the United States designed to enforce the collection of sales taxes against online retailers such as Amazon.com.”
So what does “nexus” have to do with it? The definition of the word is
1. a means of connection; tie; link.
2. a connected series or group.
3. the core or center, as of a matter or situation.
The door was opened for states to go after Amazon because of their affiliate program, which established the nexus.
Amazon’s reaction was to sever ties with affiliates in Arkansas. They continue with that decision to this day, pulling their affiliate program out of many states. Most recently, Amazon dropped around 10,000 affiliates in California.
According to the Seattle Times, Amazon is seeking a deal with Texas, similar to the one struck with South Carolina, offering 5,000 jobs (to work at a new $300 million Texas distribution center) in trade for a 4.5 year sales tax exemption. It seems the comptroller’s office estimates that Amazon owes the state $269 million in uncollected sales taxes from 2004 to 2009 — plus penalties. How that turns out is anybody’s guess at this point.
That’s not all. A coalition of hotel-casinos and small businesses in Reno, Nevada, is launching a $50,000 advertising campaign to build support for a change in tax laws so Amazon.com and dozens of other e-commerce companies would have to collect state sales taxes when they sell goods to Nevadans. These would be based on variations recently enacted in New York, Texas, Colorado and Illinois, all of which Amazon maintains are unconstitutional (Source: Associated Press)
What you need to know
If you have a physical presence (or nexus) in a state where sales taxes are collected, you must collect and pay those taxes on any and all items that fall into the taxable category.
Sales tax rates, rules and regulations vary from state to state and often from city to city, so do you homework. According to the National Retail Federation, 45 states and 7,500 cities, counties, and jurisdictions impose sales taxes. So, it can get confusing. The national average on sales tax is 9.64%, with the highest state wide taxes in California at 7.25%, followed by five states at 7%, Indiana, Mississippi, New Jersey, Rhode Island and Tennessee.
This can be overwhelming for a small business or entrepreneur that services multiple states. Your best bet is to work with a tax professional and make sure he or she is versed in each.
Oh, and by the way, consumers aren’t off the hook either. Most states have laws that require the consumer to pay a use tax when purchases online don’t include sales tax. Though this is often ignored, you are legally responsible to pay sales tax.
What’s your take on Amazon’s attempts to get out of paying sales taxes to other states?
I’m interested in hearing your opinions.
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