Amazon & You: Internet Sales and the Long Arm of the Tax Man
By: Michael J. Fleming | Posted: 24th September 2010
We all have heard or read about the plights of the states in the recent economy. Revenues from all sources are down and states are desperate to increase them. Virtually all states are becoming more aggressive in their collection efforts and many are looking at creative new statutes or ways to reinterpret those already on the books. One prime example of these efforts is the Internet. Most of the news about the Internet currently revolves around Amazon, with some statutes actually being dubbed the “Amazon Laws”. However make no mistake about it; it’s not just Amazon the states are thinking about. If you are selling or buying on the Internet the states have their eyes on you also.
The reasons so many states are looking at Internet sales are because of their explosive growth and the fact that sales or use taxes often go uncollected on these transactions. Experts estimate that the uncollected taxes for these transactions will total $18 billion dollars this year and predict that by 2012 the number will grow to $23 billion. The cumulative amounts for the period of 2009-2012 could reach $55 billion dollars. It’s no wonder the states have their eyes on the Internet; capturing these uncollected taxes would go a long way to closing their budget gaps.
In their pursuit of this Internet treasure the states are taking a number of different approaches. The states easiest to follow are those that have passed new statutes. There are currently 3 of these states that have passed “Amazon Laws”; NY, NC and RI. One of the major components of all three of these statues is what is called “Click-Through Nexus”. This nexus occurs when the seller enters into an agreement with an instate resident, where the resident is compensated for referring customers directly or indirectly to the seller. One form of this is an affiliate program where a potential customer clicks on a resident’s link and is redirected to the seller’s website. The laws are currently being challenged in court and many tax professionals have taken a wait-and-see approach.
While the professionals may be waiting, the states are not. According to BNA’s 2010 Survey of State Tax Departments, 14 additional states believe that their existing statutes allow them to pursue taxes through this “click-through nexus”. The approach of these states is much more stealthy and without the information contained in the BNA survey, many would be hearing about this the first time through an audit. The states referenced in the BNA survey are: Arizona, the District of Columbia, Florida, Iowa, Maryland, Missouri, Nevada, New Mexico, North Dakota, Pennsylvania, South Dakota, Tennessee, Texas, and Washington.
In addition to “Click-Through Nexus” many of the states are looking at (or have already passed in the case of Colorado & Oklahoma) “Sales & Use Tax Notice and Reporting Requirements” for transactions where sales taxes are not collected. Quite simply states are requiring sellers without nexus to inform purchasers that tax is due on individual transactions as well as provide year end summaries with instructions on how the taxes should be paid. There are also requirements for reporting these sales to the state and provisions for penalties for noncompliant sellers.
If the new statutes were not enough, states are aggressively searching for companies that have “old-fashioned nexus”. This nexus is caused by the usual myriad of ever-evolving activities whose importance in creating nexus can vary from state to state. Most of these activities are not directly related to the Internet and are conducted by other parts of your company, but could impact the sales tax aspect of your Internet business anyway. These activities are too many to list entirely but here is a quick list of 10 potential nexus-creating activities:
1. Owning or leasing property in a state.
2. Owning or leasing equipment in a state.
3. Travel into a state to perform sales.
4. Travel into a state to perform services such as installations, training, repair, etc, etc.
5. Travel to trade shows in a state.
6. Having payroll in a state.
7. Having agents or contractors in a state.
8. Licensing intangibles to others in a state.
9. Delivery into a state in a company owned truck.
10. Doing business with a bank in a state.
Let’s not forget those issues that are not nexus related. Issues like changing taxability (software especially), delivery methods (downloads vs hard copy) and of course drop-shipping issues. Are you responsible for the taxes on a sale someone else makes? You could be. If your purchaser is not registered in a state and you have nexus in that state you may be liable.
If you are beginning to wonder if you need to take another look at how you are approaching these issues pat yourself on the back. All too often I speak to very smart people at companies of all sizes and types, who work at all levels of the organization that I believe are much too complacent. They assume that if their system has worked up to this point why change it? Some of them are right. They stay on top of the ever-changing environment and update their policies continuously. Others find out the hard way (usually in a Sales/Use Tax Audit), that just because it worked in the past doesn’t mean it’s going to work now.
Andy Johnson, a founding partner at Peisner Johnson & Company, believes that, “The greatest tragedy when it comes to sales tax is neglecting to collect sales tax on a taxable item at the point of sale, only to have it come out of your pocket later. ” Because unlike an income tax which comes out of your pocket no matter when you realize it, sales tax that would have been paid willingly (if not grudgingly) by your customer at the time of the sale, ends up coming out of your pocket 3 to 5 years later. And, don’t forget to add the penalty and interest insult to the injury. Can you afford not to be compliant?
Ok you’ve started to wonder, now what do you do. Here are some suggested actions:
1. Educate yourself - Start with charts and matrices, attend webinars, contact the states.
2. Ask questions – Of your staff, your accountants, everyone. You can never ask enough questions.
3. Evaluate - Don’t assume your accountants or staff are up-to-date. They usually are multi-tasking.
4. Consult an expert – There are some excellent service providers that focus on issues like these.
5. Train your people – Knowledge is power. Empowered employees can help prevent problems.
There are a few good firms that can help you educate yourself or provide additional support as needed. I am partial to my employer Peisner Johnson & Company. We offer many free services designed to make your life easier. One of those free services is that we will provide you with a chart or matrix on just about any topic you would like. We also offer a free service called quick questions. If you have questions that we can answer without the need for research we will do so free of charge.
There are currently so many issues effecting Internet sales it is hard to cover them all or in great detail in a single article like this. It was my intention to alert you to as many of these issues as I could. If you have any questions or would like additional information please let me know. I can be reached at 800-940-9433 ext. 720 or by email at mfleming@peisnerjohnson.com.About the Author
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Tags: budget, mistake, amazon, affiliate program, economy, internet sales, prime example, gaps, billion dollars, explosive growth, collection efforts, nexus, statues, major components, tax professionals