Federal courts have consistently ruled that retailers must have a physical presence in a state to be required to collect sales taxes. That has allowed online retailers to offer many customers tax-free shopping. Equally important, the physical presence requirement has allowed smaller businesses using common carriers to expand their customer base without the administrative burden of collecting sales tax. But, with Congress making headway on federal legislation that would eliminate the physical presence rule for many retailers and a recent New York State Court of Appeals decision going against Amazon and Overstock.com, the sales tax collection obligations for retailers may soon become more burdensome.
On March 19th, 75 U.S. Senators supported a non-binding vote of approval for the Marketplace Fairness Act of 2013, a heavily-debated bill that is backed by a coalition of brick-and-mortar retailers such as Wal-Mart and Best Buy and vehemently opposed by certain online retailers such as eBay. Although the vote was only a preliminary approval of a vague summary of the bill that was an amendment to a budget bill, the bipartisan nature of the vote suggests that remote seller legislation could be voted into law this year.
If enacted as is, the bill would allow states to require remote sellers with over $1 million in annual gross receipts to collect sales tax (i.e., “small seller exception”). Much of the mainstream media coverage on the issue frames the bill as purely an internet sales tax, but it’s important for businesses to realize that the proposed legislation would require a business selling taxable products and services to collect sales tax on its sales regardless of whether the business sells online or otherwise.
Even without the passage of the federal legislation, states have recently been enacting laws that push the bounds of the physical presence standard. One such state is New York, where the New York State Court of Appeals on March 28th upheld the constitutionality of the state’s so-called “click-through” or “Amazon” law (Amazon.com LLC v. Department of Taxation and Finance, 601247/2008; Overstock.com v. Department of Taxation and Finance, 107581/2008). New York’s law allows the state to require an out-of-state company to collect sales tax if the company receives referrals from an in-state resident “affiliate” in exchange for a commission. Essentially, New York residents that get a commission for having a link on their website to an online retailer’s website were deemed by the court to be the equivalent to having an in-state sales force. The court distinguished these types of affiliate arrangements with passive advertising efforts that would not create a sales tax collection obligation.
With states taking varying approaches in their attempts to require remote sellers to collect sales tax and with other state courts striking down similar legislation (e.g., Illinois and Colorado), a federal solution is clearly the better solution to the seemingly inevitable result of remote sellers being required to collect tax. The passing of federal legislation will have an impact on many small businesses, as the current threshold of $1 million in sales will protect only the smallest of companies. We will be sure to keep you posted with any further developments.