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States Making Inroads at Taxing Online Sales

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States Making Inroads at Taxing Online Sales

Published: September 15, 2009

States that impose sales tax generally require vendors to collect the levy on the sales that they make. In some cases, the vendor's obligation is clear cut. When a customer walks into a store and purchases a taxable item, the vendor must collect a sales tax in addition to the purchase price. But what about the vendor's obligation to collect sales tax on a remote sale? A 'remote sale' is a transaction in which a vendor sells an item via the internet or a catalog to a customer in another state.

Remote sales are generally not taxable if the seller lacks a physical presence in the state in which the item is purchased. But this area of the law has become increasingly complex as a result of recently enacted state laws aimed at imposing sales tax on certain types of online retailers.

In 1992, the U.S. Supreme Court established the 'physical presence rule,' which states that a vendor is not required to collect sales tax unless it has a physical presence within a jurisdiction's borders. A physical presence has been defined to include in-state property, employees, or an independent sales representative.

Example. For example, if ACME Sporting Goods is based in Maryland and sells a soccer ball via its web site to a customer in Illinois, ACME would be required to collect Illinois sales tax if it had a store or employees in Illinois. However, if ACME lacked a physical presence in Illinois, the state could not require it to collect its sales tax.

As more remote sales transactions have been conducted online over the past decade by retailers such as Amazon, states have looked for ways to tax online sales in a manner that satisfies the physical presence rule.

Most states cannot impose sales tax on their residents' purchases from Amazon or other online retailers because many times the companies are not physically present in their jurisdiction.

Independent Affiliates. However, several online retailers have come to rely on independent web sites known as affiliates to promote sales. An affiliate will place a link on its website to the retailer's site and receive a commission if someone follows the link and buys something from the retailer.

Last year, New York enacted a law that presumes that an online retailer is subject to the state's sales tax collection requirements if it collects more than $10,000 in annual revenue from a New York-based affiliate. The law does not merely impose tax on the commissions earned by the affiliate, but the online retailer's total in-state sales.

Other states have taken note and have followed suit. Rhode Island and North Carolina have enacted similar measures this year.

What does all this mean to you? Depending on the circumstances, online sales can be subject to sales tax.

Think carefully about your sales tax obligations when selling products online or earning commissions through an 'affiliate relationship' with a retailer.

For an informative guide to starting an online business, check out this primer.

Steven Roll is a senior tax law editor with BNA Tax & Accounting (

About the Author:


I've started a Google group for people who want to learn more about SSUTA. It's open to all and while I don't claim to be an expert, I know some people who are. Cheers,peter---This post was edited to remove a commercial link. Read our discussion policies for more Community best practices.
Three things (and a conclusion):1. The Supreme Court's decision in the Quill case (1992) that said that you had to have physical presence to be liable for collecting state taxes but it was also pretty clear that this is up to Congress to decide, given that the burdens of interstate tax collection could be overcome in the future.2. The taxes are already due in the form of use-tax for the consumer. So really, increased prices is a red-herring.3. State governments are strapped for cash and they see this uncollected revenue as a way to make up for gigantic shortfalls.Conclusion: Between the three, it's a matter of when, not if, we will have taxation of remote sellers on the internet.And the process has certainly already begun. In addition to New York, Colorado, and North Carolina, 23 states have already passed laws supporting the Streamline Sales and Use Tax Agreement (SSUTA). This legislation creates protocols for making it easier for people to collect state sales and use tax and it seems that there is enough momentum that it will probably become a federal law pretty soon.It's time to stop speculating about how hard it will be and start getting ready to do it.
Tax... You see, if you carry around $300,000.00 each and everytime to the tax office, Besides being an affiliate millionaire, you tend to care a bit less about it all. I thought becoming rich would not change me. Well, I was wrong. I would like to add that tax as affiliate marketer is of course a good thing, but sometimes a big huge jungle from where I am doing my business. ---This post was edited to remove a commercial link. Read our discussion policies for more Community best practices.
'Can't say I have the solution - but I do like being an affiliatemarketer. It is a great way of making money and can allow for alifestyle that is freeing. Maybe the solution is just to make tons ofmoney online and then live somewhere else...except I love this country.' There might be offshore options as well, you still pay taxes but it might be less depending on your situation. Countries like Cypress, Anguilla or Belize can be good options. It costs a little bit to setup, but once you have the corp you can setup an offshore bank account. Talk to your tax accountant about the taxes, you're still responsible but might be a more viable option. My Website: YouTube Downloader ---This post was edited to remove a commercial link. Read our discussion policies for more Community best practices. Message Edited by ChristineL on 02-11-2010 09:00 PM
@ Davis great feedback
This is quite a burning issue. If you are shipping merchandise to a state where your business (or your merchant account provider) does not have a location, you will not need to collect sales tax. Some large online retailers have gone so far as to establish separate legal entities to spare their customers having to pay sales tax. Of course, this is notan option for most small e-businesses :)Even if you do not collect sales tax from customers located in your state, they are still responsible for this tax. You can expect your sales tax payments to be scrutinized closer than ever as states crack down on sales and use tax laws.
Admittedly, this whole thing is becoming muddled. Ireally believe that the internet should be tax free to promote the growth of business. In my specific case, since I sell items online at san diego screen printer, I discovered that for anyonewanting to be my affiliate outside the state of california, I needed tomaintain their re-sellers license on file. Further more, recentlyAmazon (one of the largest affiliate hub) dropped their affiliateprograms because of Taxes! Now, overnight people lost thousands ofdollards on income - Think of the stay at home mom that is now out cold thatmade some affiliate commissions online. As it is EVERYWHERE, business andindividuals will go where there is NO tax, and online business is highly mobile- I hope a handful of states will be smart and NOT adopt this - They will berewarded later, just like Nevada - low/no taxes – Have they even heard ofthe Laffer Curve!!Message Edited by NicoleD on 01-11-2010 09:10 PM
One other point the real problem from a business point of view is reporting to litterally hundreds of jurisdictions. This can add thousands of dollars in costs which produce no profit and little revenue to the states involved. For instance I'm currently involved in a project for a Texas state audit that will take about a week of programming for us to comply.nobleMessage Edited by NicoleD on 01-06-2010 09:17 AM
As an affiliate marketer, the issue of tax is important. Personally, I find this solution as one that is lazy. The states want their money - and I understand that. But, by just changing the tax law to increase their ability to tax any commerce online (which is where we are heading) - they are just being lazy. We are dealing with a revolution in terms of how business is handled. We already see it from business to customer - state lines don't matter. Honestly, we see it from country to country - but that is off topic. If we really want to fix this, we need a fresh approach to providing government funds. At least...that is my thought. Can't say I have the solution - but I do like being an affiliate marketer. It is a great way of making money and can allow for a lifestyle that is freeing. Maybe the solution is just to make tons of money online and then live somewhere else...except I love this country. Want to know how I do it? I started with this: Google Slapper Review Message Edited by NicoleD on 12-07-2009 06:02 PM

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