Guest Blog by David Seiden
Why do some online retailers collect sales tax and others don’t? Why do some online retailers collect sales tax in certain states and not in others? Why are some states requiring online retailers to collect sales tax despite not having a physical presence in the state? Over the last 10 years as online shopping has gone mainstream, the issue of when an online retailer is required to collect sales tax has grown increasingly murky.
In the “good old days,” sales tax collection on retail sales was straightforward. A consumer would go into his or her local store, buy merchandise and pay sales tax at the register. Today, many local retail stores have either gone out of business or been replaced by large national retailers. Consumers spend more time “shopping” on their computer than they do in stores. The result is a significant drain on state sales tax revenue, which – coupled with the downturn in the overall economy – has resulted in significant budget deficits in many states.
Most of these states realize that the only way to curb the drain on sales tax revenue is to aggressively enforce their existing tax laws and adopt new laws that would require online retailers to collect sales taxes regardless of whether the company has a physical presence in the state or not.
The central issue that transcends both the enforcement of existing sales tax laws and the adoption of new tax laws involves the concept of “nexus.” Nexus is typically defined as a seller’s minimum level of presence in a state before such state can require the seller to collect and remit sales tax. While the term “nexus” is not overly complicated to understand, how states apply the term has been vigorously debated in the courts and in Congress for many years.
In 1992, the U.S. Supreme Court (the “court”) ruled that before a state can require a seller to collect sales tax, the seller must have more than a “de minimis physical presence” in the state. Despite the court’s 1992 ruling, numerous state courts have held that a business with no physical presence in the state may, under certain circumstances, be liable for collecting sales tax on merchandise shipped into that state.
For example, in 2008 New York state adopted the so-called “Amazon tax,” which expanded the definition of what constitutes a vendor in New York. This new law, named after Internet retail giant Amazon.com, permits New York State to require certain out-of-state Internet retailers, with no physical presence in New York, to collect sales tax on shipments made into the state.
Since 2008, more than a dozen other states have adopted similar Amazon tax laws, with new states jumping onboard every day. Until either the court decides to hear a case involving the Amazon tax or until Congress decides to act on this issue, states will continue to impose nexus on out-of-state retailers aggressively.
During this time of sales tax uncertainty, online retailers should closely monitor their potential exposure in uncollected sales taxes and implement procedures that can help minimize future liabilities. For example, we recommend to our clients that if possible, they should file sales tax returns even if they show zero taxable sales. This way, the company starts the statute of limitations – the number of years a state can “go back” and access tax – which is generally three years in most states.
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