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Top Internet Tax Questions from Retailers Reveal Complexity of Issue

author photo of Sylvia F. Dion

Last month I presented two Webinars, both which dealt with one of my favorite (okay, my favorite) state tax topics - “Internet Sales Taxes”. The first Webinar, "State 'Amazon Laws' and Federal Remote Seller Proposals", was a two hour CPE Webinar geared towards CPAs. The second Webinar, “How to Navigate the Online Sales Tax Legislation Waters”, was a one hour Webinar which I co-presented for Retail Online Integration, a monthly industry publication geared towards online retailers, marketers, brand merchants and catalogers.

It was this second Webinar, which was attended by over 200 small-medium (and even some large) online retailers, that got me to thinking.

Now if you’ve presented a Webinar, you'll probably agree that often an audience will ask relatively few questions either during or at the conclusion of a presentation - you're likely to get maybe 5 or so. But this wasn’t the case with the Retail Online Integration Webinar. There were many, many questions presented both during and at the end of the presentation. No, this group most certainly wasn’t shy about asking questions!

I was thrilled – I loved that this audience was so genuinely interested in the topic. But afterwards, and more importantly, I realized that the volume, the tone of, and the actual questions themselves, emphasized that for many small-medium on-line retailers, this whole concept of nexus and State "Amazon Laws" and the potential impact to them if federal legislation passes, is overwhelming and complex.

As a result, I decided to write a post which would highlight some of the questions and concerns I heard from the audience that day and in the days following the Webinar, as questions continued to trickle in. My guess is these may be questions or concerns some of you may have too. I also thought I’d share some of the key points I made at the Webinar’s conclusion – sort of a recap of my Key Points slides.

So, what were some of these questions and concerns? I’ve paraphrased a few and here they are:

Q: I’m not using marketing affiliates in any state – so that means I shouldn’t worry about the State "Amazon Laws", right?

A: Unfortunately, on-line retailers can’t breathe a sigh of relief simply because they don’t have marketing affiliate programs in place. This is because there are many not so obvious activities that can create sales tax nexus – attending trade shows, soliciting sales (even if the sales solicitation is through non-employees), storing inventory in a third party fulfillment center (warehouse), etc. So even without an “Amazon Laws” in place, an out-of-state retailer needs to be aware that his activities might have already created a requirement to register and collect sales tax in a particular state.

Q: Are all “Amazon Laws” about click-through nexus? I thought they were!

A: Here’s something to keep in mind. The term "Amazon Law" has come to mean any type of state nexus expanding law intended to force out-of-state sellers to collect sales tax or encourage in-state customers to pay use tax. Certainly, what many people think of when they hear “Amazon Law” is that the law is about web-linking, click-through nexus. That is, people think of the type of law which says that contracting with marketing affiliates that post web-links on their site to a remote retailer’s online store will create an in-state physical presence and a presumption of nexus. But states are getting creative – they're adding related party nexus provisions to their web-linking laws. These provisions, which confusingly are legally called “affiliate nexus” provisions, attribute nexus to an out-of-state retailer if the retailer is related (by common corporate ownership) to another entity that has operations in the state. California’s recently re-instated Amazon Law is a perfect example. Not only does California’s Amazon Law have a click-through nexus provision, it also has a provision that essentially says if another corporation, which is commonly owned, provides services related to the products sold by the out-of-state retailer or that benefit the out-of-state retailer, that retailer is deemed to have nexus. (See my 9/11/12 post, “CA Sales Tax: Will Amazon Law Fill State’s Internet Shopping Cart?”, for more on California’s recently reinstated Amazon Law) Finally, you have one last type of law, which is sometimes also referred to as an “Amazon Law”. These Notification and Reporting laws impose requirements on out-of-state retailers to encourage the self-reporting of use tax (though some would argue that they’re also a way to force out-of-state retailers to collect sales tax). So the next time you hear that a state has passed an "Amazon Law", it's important to know whether the provisions of the new law deal with web-linking and/or related party affiliate nexus, or if the new law is a notification and reporting law.

Q: I sell on Amazon’s marketplace and use their Fulfillment by Amazon (FBA) service. Should I be concerned about nexus?

A: I hate to break the news to you, but yes, you should! As I understand it, using Amazon’s FBA service means that merchants send their product to an Amazon warehouse, where it is stored until an order for those inventory items comes in. Amazon then fulfills the orders on the merchant’s behalf – packaging and shipping the inventory to the merchant's customers. Because merchants continue to have legal ownership of the inventory they send to an Amazon warehouse, they literally have physical property in the state – a definite nexus creating activity. Not only that, many states take the position that having a third party fulfilling orders on a seller's behalf creates a nexus for the seller and a requirement to register to collect sales tax.

Q: I make less than $500,000 in sales – so that means I won’t have to worry about collecting sales tax under any of the federal proposals, right?

A: Well, it’s not that simple. You see two of the proposals, the Main Street Fairness Act (S. 1452/H.R. 2701, the first proposal, introduced in July 2011) and the Marketplace Fairness Act (S. 1832, the third proposal, introduced in November 2011) would give states the authority to require out-of-state retailers to collect a state’s sales tax if that specific state is a full-member of the Streamlined Sales Tax Agreement (SSUTA). And if a state is a full SST member, that state follows the small-seller exception as defined in the SSUTA – which currently is based on annual U.S. sales of $500,000 or less. The Marketplace Fairness Act (S. 1832) also has a separate set of requirements that states that are not SST members can implement to obtain “collection authority”. This alternative set of requirements also defines an exempt small seller as one that has U.S. sales of $500,000 or less. But keep in mind that the annual U.S. sales figure needs to include sales made my certain related businesses. So, for instance, if you’re a retailer owned by a parent company that owns other retailers – you may need to group the U.S. sales of all of the related retail entities to determine if you still meet the small seller definition. (See our recent whitepaper, "Internet Sales Tax Legislation: What It Means to Small-Medium E-Commerce (A Plain English Guide)", for more on the small seller exceptions under the three proposals.)

Q: What’s the current status of the federal “Internet Sales Tax” proposals - will any of them pass this year?

A: Of the three proposals introduced by the current U.S Congress – the first proposal, the Main Street Fairness Act (S. 1452 / H.R. 2701, introduced in July 2011) really never went anywhere. And so, this left the two other proposals, the Marketplace Equity Act (H.R. 3179, introduced in October 2011) and the Marketplace Fairness Act (S. 1832, the last of the three proposals, introduced in November 2011) to duke it out. And for a while, it appeared that the momentum would move the Marketplace Fairness Act (S. 1832) into first place, in particular because the Marketplace Fairness Act (S. 1832) offered states two ways to obtain collection authority - states could be full SST member states or could implement the Act’s alternative requirements. But this past summer, the Marketplace Equity Act (H.R. 3179) seemed to gain some momentum following a July 24th Judiciary Committee hearing. A hearing, which many observers felt was fairly amicable – at least by political standards – and justly focused on what the small seller exception should realistically be set at. (See my 8/13/12 post, "Marketplace Equity v. Marketplace Fairness. Is Either the Right Solution?", for more on this hearing.) But with Congressional elections just a few weeks away, there are many who believe a lame duck Congress won’t act on either proposal. Still, I’m a believer in the saying “it’s not over till the fat lady sings” and she ain’t sung yet!

And on that note, I’ll add that I’ve seen reports of proponents stating that even though it may be difficult for one of these proposals to pass before the end of the 112th Congressional, session, there’s a decent possibility that it will happen. It’s also been suggested that one of the proposals (most likely the Market Fairness Act) could be tacked on to one of the “must-do” bills that would address the expiring federal tax provisions. (See “Widening the Net - States Optimistic About Their Chances of Taxing Remote Sellers”, AccountingTODAY, 9/1/12; “Sales Tax Burden Looms for Online Sellers”, eCommerceBytes, 10/9/12; and “E-Commerce Sales Tax Bill May Emerge in ‘Fiscal Cliff' Talks After Election”, Bloomberg BNA, 9/26/12)

So in conclusion, I’ll leave you with a few more points to ponder:

  • “Amazon Laws” require that there be nexus to the “taxing state” - even if nexus is only created through a mere web-link posted on a compensated marketing affiliate’s web-site, there is still a nexus requirement!
  • The federal remote seller proposals do not require nexus to the “taxing state”. As long as a state meets and fulfills the federal law’s requirements, the state can require remote sellers (that do not meet the definition of a small seller) to collect their state’s sales tax.
  • “Amazon Laws” will not cease to exist even if federal legislation is enacted! A state may prefer to enact is own state law as opposed to becoming an SST member state or complying with the federal law’s alternative simplification requirements.
  • Because State Amazon Laws may co-exist along with a federal law, businesses will still be required to focus on their nexus profile. However, they will also need to focus on what actions various states are taking to comply with the federal law.
  • State “Amazon Laws” and the federal proposals will impact many “smaller” internet sellers.
  • These laws do not impact online only retailers, brick-and-mortar retailers that make sales over the internet are also impacted by these developments.
  • If neither the Marketplace Fairness Act (H.R. 3179) or the Marketplace Fairness Act (S. 1832) is passed in the current Congressional session, it is highly likely that similar legislation will be introduced by the next Congress. It is also likely that new/comparable legislation will be introduced early in the next session.
  • Whether we agree with it or not, it’s no longer a matter of “if” federal legislation will pass, it’s a matter of “when”.

Final Notes

Admittedly - I've thrown quite a bit of content into this post - and I've only touched on the material I covered in the my recent Webinar presentations. But here's my point, "Internet Sales Taxes", regardless of how you refer to them, are a complex issue which will impact many companies - not just those with marketing affiliates, not just those that are online only retailers, and not just those that are mega-online retailers. Which is why I made this point in my presentations: "If your company is making sales over the internet, it is extremely important to keep up-to-date on 'Internet Sales Tax' developments" (BTW, you can link to a PDF of my Retail Online Integration Webinar presentation here.)

And one last thing - I really love to hear your feedback. Did you find the Q & A content (and format) beneficial? Would you like to see more posts take this format? If you have any other questions - whether it's a clarification regarding any of the above or a new question you'd like to see answered, please post your comment (or should I say question) below. And if you want to stay on top of this issue - and want to make sure you get all our updates - subscribe to the SalesTaxSupport.com blog (using the orange RSS "Subscribe" box that's just above my photograph) and/or follow me on twitter @SylviaDionCPA (I tweet all my new posts).

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Missed my last post? Catch it here: “CA Sales Tax: Will Amazon Law Fill State’s Internet Shopping Cart?” or check the list of posts by "Internet Tax" category - to view all.

What’s up next? more updates on State Amazon Laws and on the Federal remote seller proposals, new posts on sales tax issues of other e-Commerce areas (e.g., “Groupons”, “Cloud Computing”…)

About the Author: Sylvia F. Dion, MPA, CPA, is the Founder and Managing Partner of SALT Consulting firm, PrietoDion Consulting Partners LLC. Sylvia has been covering Internet Sales Tax developments for SalesTaxSupport’s Issues blog since 2011. Sylvia is also the “U.S. Sales Tax for Foreign Sellers” contributor for SalesTaxSupport’s Industry blog and the “Massachusetts Sales Tax” contributor for SalesTaxSupport’s State blog. You can follow Sylvia on twitter and on Google+ and can contact Sylvia via e-mail at sylviadion@prietodiontax.com or at 978-846-1641.

Comments or questions may be submitted by using the on-page "Comment" feature, subject to disclaimer at bottom of page. Other contact options (and Consultation Requests) are also available on Sylvia's associated Firm Profile page.

Other recent “Internet Tax / E-Commerce” posts by Sylvia F. Dion, CPA:

NOTE: All blog content, comments, and participation subject to disclaimer at bottom of page.

Comments

2 Responses to Top Internet Tax Questions from Retailers Reveal Complexity of Issue

  • Posted by Anna on March 24, 2016 4:20pm:

    We have Nexus in Calif. but our small on line ecommerce accounts claim that they do not have Nexus. Are we required to collect sales tax simply because we have Nexus?

  • Posted by Marvin on October 27, 2015 10:37am:

    My company has a test that clients take online. One of the clients is located in the EU. Do I need to include New Mexico sales tax on my invoices?

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