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June 10th, 2008, 08:33 PM #1
State Sales Tax Issues (New York, California, etc.)
- Join Date
- January 18th, 2005
I spent the last 3 months working on another aspect of internet marketing, so New York's efforts to force sales-tax collections by companies with affiliates in New York didn't draw my attention.
After reading through many, many posts about New York's changed law, and one post about new efforts by the California Board of Equalization to collect taxes on tobacco products, I realized that I haven't seen a discussion of the "real issue" which is the probable forced shift to nationwide sales-tax collection by all merchants.
If I recall correctly, the issue has been "undue burden on interstate commerce," and federal courts have generally ruled that it would be an unreasonable burden for a small mail-order company to be forced to collect and remit taxes for many dozens of jurisdictions where the company has no physical "presence."
Note that within the United States, there are 50 states plus several territories [for example, Washington DC and Puerto Rico], most of which impose sales taxes. But within each state there are often different tax rates based on county and city boundaries, so there are actually many hundreds of distinct tax rates and many more than 50 jurisdictions receiving payments.) I believe that's been the main justifications for the federal laws which banned state sales-tax laws that would treat internet transactions differently than "offline" transactions.
In addition, different states impose taxes on different categories of products, and define those categories differently. (For example, some states impose a "sales tax" on services such as attorney and accountant fees; some states impose taxes on "dine-in" meals but not on "grocery" purchases, with different states defining those categories differently, while other states exempt or include both categories.)
(1) The New York law doesn't address the issue of "undue burden," but instead seeks to bypass it by defining a company's physical presence in a state as including a wide range of roles, including traditional "affiliate marketing" where someone is paid for advertising under a percentage-of-sales payment model. There are lots of analogies, including the "manufacturer's representative" (who actively works with prospective customers in a state, but is not an employee and does not process orders), but none of them fit perfectly.
Some folks seem to believe that the New York law doesn't affect merchants whose New York affiliates merely display banners or text links, and who do not engage in more "active" strategies such as "direct-to-merchant PPC." From my brief reading of the law and technical memorandum, I'm not sure this analysis is correct -- but I'll leave that to an attorney licensed in New York to evaluate.
(2) Sales taxes represent an extremely important revenue source for most states and local jurisdictions; in many states, funding for some programs is apportioned partially based on the sales taxes collected in a county or city. If those taxes are not collected due to a shift to online purchases from out-of-state merchants, this makes the sales-tax system less fair (and incidentally, more "regressive," since online sales are disproportionately for "non-essential purchases").
Of course, most states impose a "use tax" on consumers and businesses who purchase products from out-of-state merchants, but enforcement of use taxes is nearly impossible without the cooperation of the out-of-state merchants. In fact, the California BOE letters to "tobacco sellers" (and apparently at least one affiliate) were triggered by special data-sharing laws at the federal level that allowed the state to identify unreported transactions "involving" California buyers or sellers.
Whether you believe that sales and use taxes are fair or reasonable, they are critically important to many states, counties, cities, local agencies (such as transit systems), and school districts. And it seems unfair to force Circuit City and Fry's Electronics to collect sales tax when I buy a 22" monitor from them, but not to require Amazon to collect sales tax when I buy the same 22" monitor from them.
Since we're in the early or middle stages of a severe recession, I expect that many state taxing authorities and legislatures will seek to "improve tax collection" and "reduce tax evasion" using clever techniques like New York. I expect that consumers faced with declines in state revenue and funding will be more receptive than in past years to the idea of enforcing sales-tax collection more broadly.
(3) When I last examined this issue (several years ago), my conclusion was that federal courts would allow states to require collection of sales taxes by many more "out of state" resellers, if the burden of computing, collecting, and remitting those taxes was not unreasonable. The obvious solution is a consolidated nationwide system which would allow merchants to establish a single account (or accounts with only a very few systems) in order to handle state sales taxes. I believe that there were several competing "systems" proposed by different factions of state tax collection agencies. I recall that one issue was whether such systems should accommodate more complex tax systems from many states, or support only the tax rules for "simpler" states.
I suspect that part of New York's motivation with this tax law was to try to "move this forward," to try to create a legal taxation extension (by looking more closely at "physical presence" which might eliminate the "undue burden" test for interstate commerce) which, once applied, might lead to a unified system for computing, reporting, collecting, and remitting sales taxes, applied to all businesses equally.
(What would it look like? Probably 99% of businesses would use an API or a "plug in" to shopping-cart software.)
Another possible outcome is the adoption of a unified "national sales tax," collected by the US Government, with a portion distributed to states in lieu of state sales taxes. I don't think there's any doubt that Congress could enact such a law, and it would greatly simplify the situation, but of course it's political suicide to suggest it.
There are other alternatives -- some folks might wish to use this issue to simply ban all sales taxes which impact interstate commerce (effectively, all sales taxes). Others might seek to exploit this issue to force a shift from our income-tax system to a greater reliance on sales taxes!
(4) What do WE want, as affiliates and merchants and consumers? Of course, that depends on how the current tax systems affect you, including how the New York law might impact you. For example, merchants like Amazon (which has arranged its business to avoid being required to collect sales taxes in most states) clearly perceive an advantage; merchants located in states with no sales tax or who sell primarily to "out-of-state" customers would also perceive an advantage to the current system: consumers will buy from them in order to evade sales tax collection -- not honestly, since it is illegal for the consumer to fail to report and remit a use tax payment, but certainly 99% of transactions are never reported.
As an affiliate, of course, we crave simplicity, and we don't want to be "barred" or "restricted" in our activities based on arbitrary physical boundaries (if I live in Rochester, New York, I'll be excluded or restricted, but since I live in Hayward, California, I don't face that issue YET). But we also live in our own communities, and we want our schools funded.
(5) After all this, what do I think? I think that it's probably right to "upset the apple cart" as New York is doing, to force the issue to the surface. I suppose it would have been better if the law took effect (for example) on December 1, since an election year is not a good time to reach a consensus. But the current system is unfair, and must be changed, and New York's strategy (and to a much smaller extent, California's) may provide just enough "kick in the pants" to make something happen.
Finally, I wonder if Amazon is the "wrong litigant" to fight this law. Amazon is better situated to enforce sales-tax collection laws than any other etailer on the planet, and its burden from collecting sales taxes in New York is likely to be trivial. (Please don't misunderstand: the impact would be huge, as many New York consumers would choose not to buy from Amazon if sales tax were collected. But the actual burden of tracking, computing, collecting, and remitting tax would be trivial to Amazon, even compared to companies which sell exclusively within New York.)
June 10th, 2008, 09:21 PM #2
I tend to agree that this is just the start of a push towards national tax collection. If I remember right, there are 18 or 19 other states that are looking to implement sales tax charged on online transactions in the near future including my home state of Washington which is requiring merchants to register and collect sales tax on the city and county level for all sales made within Washington by companies with Washington nexus.
Talk about your undue burden - etailers small to large are being asked to account for reporting and payment of taxes to over 300 tax districts with 20+ distinct tax rates.
As the economy slides, the states counties, etc are looking for revenue where they can get it and it's really just a matter of time before this is universal - the only issue to me is when and how it's finally mandated. My guess is that all of the states who haven't addressed this yet are waiting in the wings on the Amazon/Overstock decision to decide their next steps.
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