Taxing E-Tailers

E-tailers are confronting challenges from aggressive taxing states, such as New York, Rhode Island, Arkansas, California, Connecticut, Illinois, and North Carolina. States are pursuing remote vendors to generate tax revenue through legislation, audit, and lawsuits.

U.S. Supreme Court cases have required direct or mail order businesses to have a physical presence with a state before requiring them to pay state sales or use taxes from in-state customers.

In 2009, New York was the first state to enact legislation targeting e-retailers whose website programs involve New York residents. For instance, Amazon.com has an Associates Program whereby independent individuals or entities known as “Associates” provide a link on their websites to the Amazon.com website. If a visitor to the Associate’s website clicks on the link and buys something from Amazon’s website, the Associate gets a commission. Any purchase by the visitor occurs on Amazon’s website, and Amazon is responsible for all customer inquiries, returns, complaints, refunds, without any Associate involvement. New York’s tax law goes after an e-retailer with at least $10,000 of gross receipts from sales to New York residents, whether from a website link or otherwise. Under the tax law, the e-retailer is presumed to have nexus and required to collect New York sales and use taxes from all of its New York customers. Companies doing business online do not like paying taxes not just because of the monetary nature, but because of the administrative burden of determining when a purchase comes from a certain state for assessing a tax.

Amazon.com challenged the New York statute in Amazon.com LLC v. New York State Dept. of Taxation and Finance (Nov. 4, 2010) At trials in a New York Supreme Court, the statute was upheld. The statute was then affirmed in 2010 by a New York appellate court. Passive advertising in New York that generated $10,000 or more of sales did not create a taxable nexus with New York, but court viewed the Amazon.com Associates as possibly soliciting sales for Amazon in the New York market.

With states going after e-tailers, Amazon.com has terminated its Associate program in many states. In California, Amazon.com challenged a click-through nexus law through a ballot referendum to repeal the law. California agreed to delay implementing the law in exchange for agreements from Amazon to build distribution centers and other facilities in California to create 10,000 full-time jobs and 25,000 seasonal jobs by 2015. In Tennessee, Amazon.com reached similar arrangements to create 3,500 jobs in Tennessee and open facilities.

Each state attacks e-tailers differently . South Dakota requires e-retailers to notify each in-state customer on how much state use tax the customer owes the state for online or direct mail purchases. Colorado’s statute requires an e-retailer to not just notify customers, but also provide an annual report listing its customers to that Department of Revenue.

Congress in in the middle of federal internet sales tax legislation that may permit states to levy their sales and use taxes on remote e-retailers. States will need to balance click-through nexus laws as a way to raise revenue against agreements with e-tailers to create jobs.

For complex tax questions, contact an experienced New York tax attorney.