"As an online retailer, I don't have to collect any sales tax." I hear this from clients all the time and it is absolutely not true, maybe. You see, one of the hottest areas of commercial law right now concerns the internet and which internet sales are subject to sales tax. States are hurting for revenue and trying to collect it everywhere they can. Online retailers are a particularly attractive target since they don't have a physical presence in the state and therefore won't lay off any angry voters if they are forced to reduce or eliminate operations. Eager to clear up the muddy waters a little, I have prepared this brief guide on the state of sales tax for internet retailers today and how all of this affects us as online entrepreneurs.
Camelot, the Garden of Eden, and the Way Things Were
In the heady early days of the internet companies were valued at billions solely on the basis of their business plan and, by federal decree, all internet sales were exempt from sales tax. Maybe, depending on how you read the law. Flash to 2007 and "The Internet Tax Freedom Act Amendment Acts of 2007" which prohibits states from taxing internet access or impose "multiple and discriminatory taxes" on internet commerce. What the Hell does that mean? It means that the Garden has been breached, the apple bitten into, and Camelot has fallen. Absolutely NOT precluded was the state and local ability to impose sales and use taxes as they would for any other type of transaction.
Sales Tax Basics
Sales tax is an entirely state and local affair and therefore only generalizations can be presented here. Generally, a sales tax is imposed by a jurisdiction upon the sale of a "tangible" good (you can drop it on your foot) to a final consumer located within that same jurisdiction. Theoretically, it is the consumer that pays the tax (although it can be argued that the consumer ultimately pays every tax) but it is the merchant's or vendor's responsibility to collect and remit the tax to the taxing jurisdiction. Also in theory, anytime the consumer purchases something from a vendor that doesn't collect the tax the consumer is then responsible for paying a "use tax." This use tax also applies when the consumer buys an item in one jurisdiction and then transports it for "use" to another jurisdiction; they must pay the difference between the sales tax of their home jurisdiction and the sales tax of the jurisdiction where they bought the item. The point here is to get all those Californians who travel to Oregon to buy stuff to have to pay California tax when they bring it back home.
How All This Comes to Bite Your Online Presence Ass
This is how I have seen people get caught for not paying enough attention to their sales/use tax responsibilities. John Taxpayer gets audited by the state and the mean, sadistic auditor demands to see receipts for purchases to see if John has paid his sales tax. John produces his receipts only to find out that he didn't pay some taxes (I mean really, who looks at those things)? Sobbing uncontrollably, John breaks down and blames Jill OnlineRetailer(.com) for not collecting the tax. Smelling blood in the water, the auditor collects his pound of flesh from John and moves on to audit Jill. While the tax is on the consumer, Jill has the obligation to collect it and the auditor can have Jill cough up the dough for all the clients that Jill did not collect sales tax for. In theory, Jill can then turn around and collect it from the consumers but good luck with that.
So Who Do I Pay Tax To?
The essential idea here is the concept of "nexus." Every merchant that carries on commerce across state lines owes a tremendous debt of gratitude to mail order office supplier Quill Co. In 1991 Quill took the state of North Dakota all the way to the Supreme Court with the argument that it should not have to collect sales tax on products it sold within the state as it did not have a "nexus" (funny legal term for a significant presence) in North Dakota. Our heroes at Quill won, of course, and Quill has been the law of the land ever since. Basically the Quill decision means to you and me that, if we operate our internet store out of our residence in the state of California and we ship something Fedex to a customer outside the state that we cannot be obligated to collect sales tax on it to remit to the other state. In California, on the other hand, we clearly do have nexus and California can absolutely require you (and does require you) to collect tax on all sales to customers within the state.
I Have Nexus Where?
Traditionally you have nexus anywhere you have other than "de minimus" operations. Triggering events include the location of employees, consistent delivery by your own employees of goods into the state, and possibly even participation at a trade show inside the state. That's right, as I mentioned from the outset it is in the best interest of the states to tax businesses from outside the state and if the payout is big enough they will hang their hat on any little presence in the effort to establish nexus. So that workshop that you did at SXSW in Austin may, in the eyes of Texas, require you to pay sales tax for all sales within the state, even if they were shipped directly to the consumer via Fedex at another point of time during the same year. Please note that I am not advising you to pay them, only informing you that there is the possibility that they may try to collect.
So Does Barnes and Noble Have Nexus Wherever They Have Stores?
Not necessarily, the ingenious lawyers at all the major online retailers have created separate companies that function as separate legal entities for their online operations. In other words, BarnesandNoble.com is a distinct company from Barnes and Noble, Inc. and is most likely based in a sales tax free state.
Tax-free Service
Sales and use taxes are by definition on "goods" and exempt "services." So that consulting gig that you did in Nevada might not subject your clients to Nevada sales tax but the instructional materials that you brought with you may be. Every state and district is free to define goods and services as they please (within Constitutional limits) and so it gets very complicated. For example "custom software" is exempt from sales tax in the State of California on the grounds that it is a service but is taxable in Mississippi.
Affiliate Programs of Online Retailers
As affiliates we don't have to collect the tax, so none of this affects us, right? Well hold your horses there partner because affiliates are the new battering ram with which the states are beating at the door that protects internet retailers from the obligation to collect sales tax. The nefarious State of New York has taken the lead here, arguing that the use of an affiliate marketer whose operations are within the state effectively establishes nexus in New York. So the fact that Susie Shoemoney, who lives on Long Island, has a popular blog that is read around the world and puts an affiliate link selling a product through Amazon.com onto her blog would subject the entire operations of Amazon.com to sales tax in New York?
That is what the state says, although Amazon, to its credit, is fighting this one through the courts. In Colorado currently there is an enormous hubbub as Amazon has dumped all affiliate marketers within the state as a response to a similar measure. If you are an affiliate marketer or you use them for your business then keep your eyes glued upon the New York proceedings because, if the New York ship ultimately sets sail, you can expect a raft of other states to jump on board. The end result could be some states will become affiliate friendly while some won't.
Camelot, the Garden of Eden, and the Way Things Were
In the heady early days of the internet companies were valued at billions solely on the basis of their business plan and, by federal decree, all internet sales were exempt from sales tax. Maybe, depending on how you read the law. Flash to 2007 and "The Internet Tax Freedom Act Amendment Acts of 2007" which prohibits states from taxing internet access or impose "multiple and discriminatory taxes" on internet commerce. What the Hell does that mean? It means that the Garden has been breached, the apple bitten into, and Camelot has fallen. Absolutely NOT precluded was the state and local ability to impose sales and use taxes as they would for any other type of transaction.
Sales Tax Basics
Sales tax is an entirely state and local affair and therefore only generalizations can be presented here. Generally, a sales tax is imposed by a jurisdiction upon the sale of a "tangible" good (you can drop it on your foot) to a final consumer located within that same jurisdiction. Theoretically, it is the consumer that pays the tax (although it can be argued that the consumer ultimately pays every tax) but it is the merchant's or vendor's responsibility to collect and remit the tax to the taxing jurisdiction. Also in theory, anytime the consumer purchases something from a vendor that doesn't collect the tax the consumer is then responsible for paying a "use tax." This use tax also applies when the consumer buys an item in one jurisdiction and then transports it for "use" to another jurisdiction; they must pay the difference between the sales tax of their home jurisdiction and the sales tax of the jurisdiction where they bought the item. The point here is to get all those Californians who travel to Oregon to buy stuff to have to pay California tax when they bring it back home.
How All This Comes to Bite Your Online Presence Ass
This is how I have seen people get caught for not paying enough attention to their sales/use tax responsibilities. John Taxpayer gets audited by the state and the mean, sadistic auditor demands to see receipts for purchases to see if John has paid his sales tax. John produces his receipts only to find out that he didn't pay some taxes (I mean really, who looks at those things)? Sobbing uncontrollably, John breaks down and blames Jill OnlineRetailer(.com) for not collecting the tax. Smelling blood in the water, the auditor collects his pound of flesh from John and moves on to audit Jill. While the tax is on the consumer, Jill has the obligation to collect it and the auditor can have Jill cough up the dough for all the clients that Jill did not collect sales tax for. In theory, Jill can then turn around and collect it from the consumers but good luck with that.
So Who Do I Pay Tax To?
The essential idea here is the concept of "nexus." Every merchant that carries on commerce across state lines owes a tremendous debt of gratitude to mail order office supplier Quill Co. In 1991 Quill took the state of North Dakota all the way to the Supreme Court with the argument that it should not have to collect sales tax on products it sold within the state as it did not have a "nexus" (funny legal term for a significant presence) in North Dakota. Our heroes at Quill won, of course, and Quill has been the law of the land ever since. Basically the Quill decision means to you and me that, if we operate our internet store out of our residence in the state of California and we ship something Fedex to a customer outside the state that we cannot be obligated to collect sales tax on it to remit to the other state. In California, on the other hand, we clearly do have nexus and California can absolutely require you (and does require you) to collect tax on all sales to customers within the state.
I Have Nexus Where?
Traditionally you have nexus anywhere you have other than "de minimus" operations. Triggering events include the location of employees, consistent delivery by your own employees of goods into the state, and possibly even participation at a trade show inside the state. That's right, as I mentioned from the outset it is in the best interest of the states to tax businesses from outside the state and if the payout is big enough they will hang their hat on any little presence in the effort to establish nexus. So that workshop that you did at SXSW in Austin may, in the eyes of Texas, require you to pay sales tax for all sales within the state, even if they were shipped directly to the consumer via Fedex at another point of time during the same year. Please note that I am not advising you to pay them, only informing you that there is the possibility that they may try to collect.
So Does Barnes and Noble Have Nexus Wherever They Have Stores?
Not necessarily, the ingenious lawyers at all the major online retailers have created separate companies that function as separate legal entities for their online operations. In other words, BarnesandNoble.com is a distinct company from Barnes and Noble, Inc. and is most likely based in a sales tax free state.
Tax-free Service
Sales and use taxes are by definition on "goods" and exempt "services." So that consulting gig that you did in Nevada might not subject your clients to Nevada sales tax but the instructional materials that you brought with you may be. Every state and district is free to define goods and services as they please (within Constitutional limits) and so it gets very complicated. For example "custom software" is exempt from sales tax in the State of California on the grounds that it is a service but is taxable in Mississippi.
Affiliate Programs of Online Retailers
As affiliates we don't have to collect the tax, so none of this affects us, right? Well hold your horses there partner because affiliates are the new battering ram with which the states are beating at the door that protects internet retailers from the obligation to collect sales tax. The nefarious State of New York has taken the lead here, arguing that the use of an affiliate marketer whose operations are within the state effectively establishes nexus in New York. So the fact that Susie Shoemoney, who lives on Long Island, has a popular blog that is read around the world and puts an affiliate link selling a product through Amazon.com onto her blog would subject the entire operations of Amazon.com to sales tax in New York?
That is what the state says, although Amazon, to its credit, is fighting this one through the courts. In Colorado currently there is an enormous hubbub as Amazon has dumped all affiliate marketers within the state as a response to a similar measure. If you are an affiliate marketer or you use them for your business then keep your eyes glued upon the New York proceedings because, if the New York ship ultimately sets sail, you can expect a raft of other states to jump on board. The end result could be some states will become affiliate friendly while some won't.
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