Internet retailers will have to collect sales tax, with or without the Marketplace Fairness Act

May 23, 2013

Among opponents of the Marketplace Fairness Act, there is a sense that if they succeed in blocking the bill, online retailers won’t have to collect sales tax.

Not so.

First, online retailers already have to collect sales tax for any state where they have nexus, defined as a physical presence. Warehouses and offices definitely fit the requirement, but some states also require any retailer selling at a fair or convention to collect sales tax.

More importantly, states can pass their own online sales tax laws. While the Supreme Court’s ruling in Quill v. North Dakota says that states can only require retailers with nexus to collect sales tax, states have been pushing against the edges of that ruling for some time by redefining “nexus.”

Affiliate nexus laws have been perhaps states’ most popular tool. These laws redefine “nexus” to include any retailer with a marketing affiliate located in the state. New York famously used an affiliate nexus law to get Amazon to collect New York sales tax, and with the court’s March ruling that the law can stand, more and more states are following its lead—most recently Kansas and New Mexico. West Virginia has gone even further by saying that having an individual perform services or solicit business in the state also qualifies a retailer for nexus. What is meant by “services” and “solicit” has yet to be defined.

The use of a drop shipper can also trigger a requirement to collect sales tax. If a customer and drop shipper are located in the same state, sales tax must be collected on the purchase—no matter where the retailer is located.

States are hurting for funds, and they aren’t going to ignore the $11 billion in sales tax that a University of Tennessee study found is going uncollected. If federal legislation doesn’t pass, they will continue to enact their own laws, increasing the number of retailers with nexus in the state and who therefore must collect sales tax.

Unfortunately for retailers, that means a nationwide patchwork of sales tax laws to navigate, all with varying requirements and definitions.

The Marketplace Fairness Act, in contrast, requires states to simplify and standardize their sales tax rules, so it will be easier for a retailer to collect sales tax for multiple states. And with this legislation in place, states will have no reason to pass their own laws aimed at getting online retailers to collect sales tax.


Amazon makes a deal with Indiana. Who’s next?

January 24, 2012

Indiana has been a member of the Streamlined Sales and Use Tax Agreement (SSUTA) since 2005, so we here at FedTax were surprised when we heard that affiliate nexus legislation (sometimes called “Amazon tax”) was being proposed there (H.B. 1119). Regular readers of this blog know that affiliate nexus laws expand the definition of nexus to include affiliate marketers— locally based websites that provide marketing for out-of-state merchants. Affiliate nexus laws are generally ineffective because, time, and time, and time,  and time again the impacted e-commerce retailers have demonstrated their willingness to sever ties with their in-state affiliates so they can avoid being singled-out as the only remote retailers being required to collect.

We were very pleased when we learned this was not going to happen in Indiana.  Governor Mitch Daniels announced that Amazon has agreed to begin collecting sales tax in Indiana in 2014—or even sooner if Congress enacts guiding legislation, like the Marketplace Fairness Act  (S.1832). In exchange, the Indiana legislature will not advance the proposed affiliate nexus legislation. As an additional benefit, the Indiana-based Simon Property Group (the largest shopping mall owner in the U.S.)  has agreed to suspend its lawsuit against the Indiana Department of Revenue over its failure to require Amazon to collect sales tax despite its three distribution warehouses in the state. Governor Daniels said that Indiana is the 4th state with such a tax collection agreement with Amazon, joining California, Tennessee, and South Carolina.

Now even more states are considering similar legislation. We do not intend to hatch a conspiracy theory, but some could draw the conclusion that these bills are being used as an indirect method of “requesting” that Amazon open distribution centers in their state. We hope Congress will act soon to end all this craziness.


Michigan becomes latest state to consider affiliate nexus legislation

September 29, 2011
Michgan State Capitol

MLive: Michigan becomes latest state to consider affiliate nexus legislation

Michigan has become the latest state to consider affiliate nexus legislation, according to this article on MLive.com. Although the state bill (HB 5004) is being referred to by the Michigan media and even several of its sponsors as “the Main Street Fairness Act”, it is completely different from the federal bill of the same name, introduced in July by Senator Dick Durbin.

The state bill would require online retailers with affiliates in Michigan to collect sales tax.

The federal bill, on the other hand, would not affect affiliates at all. It would authorize states that have simplified their sales tax laws—as already Michigan has—to require all online retailers, regardless of location, to collect sales tax.

The reasons for supporting online sales tax collection make a lot of sense:

“We are trying to level the playing field for Michigan retail businesses,” said Barb Stein, owner of Great Northern Trading in downtown Rockford. “We want to make sure that anybody that sells something in Michigan subject to sales tax has to collect it, including Internet retailers.”

Stein was part of the press conference Tuesday unveiling the proposed Michigan Main Street Fairness Act, co-authored by state Reps. Eileen Kowall, R-White Lake Township, and Jim Ananich, D-Flint.

Closing the loophole could save the state $141.5 million in lost sales tax revenue, generate as much as $126 million in additional sales and lead to the creation of 1,600 jobs,according to a report released last week by Lansing-based Public Sector Consultants.

“The uneven playing field reduces economic activity across the state and prevents small businesses in Michigan from adding jobs,” said Sikkema, a senior policy fellow at the nonpartisan think tank and a former Republican House minority leader from Grandville.

But the federal Main Street Fairness Act would have all these benefits without the drawbacks of the recent rash of state-by-state “affiliate nexus” or so-called “Amazon tax” bills. Retailers usually respond to state affiliate nexus bills by dropping their affiliates in the state, which means the in-state affiliates have to either move out of state or face an enormous drop in income. What’s more, these bills have repeatedly proven not to bring an increase in sales tax revenue—they’re simply ineffective.

There’s a terrific editorial in favor of the Michigan bill that laments the fact that state affiliate nexus laws are necessary, that Congress hasn’t yet passed the federal Main Street Fairness Act:

Michigan businesses have struggled enough without politicians adding to their troubles. Yet the burden they’ve faced in recent years has not been relieved by a simple measure Congress could take. Congress could have empowered states to collect taxes on remote sales made to their citizens — sales over the Internet and through catalogues. E-commerce in particular has become an increasingly common way to do business. . . .

Jobs that could have been created in our local communities will not be created, because bricks-and-mortar retailers in Michigan operate at a disadvantage against their virtual rivals. If e-tailers can spare their customers the 6 percent sales tax, main street stores get undercut on price, especially where large purchases are concerned.

With Congress failing to act, members of the state legislature are going to take another run at it this important question. Tuesday, state Reps. Eileen Kowall, R-White Lake Township, and Jim Ananich, D-Flint, introduced the Main Street Fairness Act.

The act would level the playing field between in-state retailers — who pay taxes and employ people in Michigan — and remote retailers who do not. The bills should be passed by lawmakers.

The greatest irony is, Michigan has already done all the work needed and enacted laws necessary to simplify its sales tax laws in accordance with the Streamlined Sales and Use Tax Agreement. The federal Main Street Fairness Act requires states to do this before they can mandate all online retailers to collect sales tax. So Michigan has already made sales tax collection easier for businesses and is poised to benefit from the federal legislation as soon as it is passed by Congress—but the state legislators still feel the need to look at affiliate nexus legislation because right now it’s the state’s only recourse to get at uncollected online sales tax revenue without Congress taking action. Hopefully Congress will soon pass the already pending Main Street Fairness Act, so Michigan is not forced to enact H.B. 5004 and inadvertently hurt its thousands of affiliate marketing businesses.

We understand why Michigan is considering affiliate nexus legislation, but the state would do better to put its full support behind the federal Main Street Fairness Act. It’s better for everyone—states, affiliates, online retailers, and consumers.


THUD (Part 2) California legislature repeals ABX1 28 – All to work to pass the Main Street Fairness Act by July 2012!

September 10, 2011

California legislature approves amended AB 155, repeals ABX1 28! AMZN to reinstate CA affiliates!

[UPDATED 9/10 @ 6:30 AM PDT] We were very excited to learn that in the final hour of their 2011 legislative session, the California legislature overwhelmingly passed a heavily amended version of AB I55  (California Senate voted 39 to 1 in favor, the Assembly voted 59 to 8 in favor).

Although the text of the amended bill is not yet now available for public inspection (text of substantive amendment included below), it has been reported on by several authorative sources, including California Senate Republican Leader Bob Dutton (R-Rancho Cucamonga), California BOE Member George Runner, the Associated Press, and the San Francisco Chronicle.

Here’s what we have learned so far:

  1. AB 155 (as amended) repeals ABX1 28 (see our original post “THUD! Did Congress Hear That?“)
  2. Amazon will reinstate its 10,000+ California affiliates

    “This bipartisan, win-win legislation will allow Amazon to bring thousands of jobs and hundreds of millions of investment dollars to California, and welcome back to work tens of thousands of California-based advertising affiliates,” Paul Misener, Amazon’s vice president of global public policy, said in a statement.

  3. All parties (including California legislators, local and national retailers, and Amazon) will work with Congress to pass federal legislation (the Main Street Fairness Act) by July 2012!
  4. If Congress fails to act by July 2012, the original terms of ABX1 28 will be reinstated.

As we have stated several times before, we firmly believe this is the best course of action:

As states such as California and Illinois enact affiliate nexus legislation (so-called Amazon tax laws) to attempt to collect sales tax due on online purchases, small businesses across the country are being caught in the crossfire. Affiliate marketers are forced to either find entirely new sources of revenue or flee to another state. Meanwhile, online retailers that rely on affiliate marketing are forced to either eliminate their established sales and marketing teams or come into compliance with the new laws.

The better solution is the anticipated Main Street Fairness Act, which incorporates the Streamlined Sales and Use Tax Agreement (SSUTA). SSUTA streamlines and simplifies state sales tax regulations, making it easy for retailers to collect sales tax for multiple states. SSUTA is the cooperative effort of 44 states (including California and Illinois), businesses, political leaders, and industry associations. States that adopt SSUTA have committed to make sales tax collection easier for all retailers, online and offline, large and small.

Although AB 155 has passed the legislature, Governor Brown has until October 7th to sign it into law; if he doesn’t—well, then all bets are off. Timing-wise, one would expect (or at least hope) the governor will make a decision in advance of the end-of-September deadline for Amazon to submit its half-a-million signatures in support of its referendum for voter repeal ABX1 28.

We are truly inspired by this dramatic twist of events in the legislature of the eighth-largest economy in the world. We look forward to the promised bipartisan effort in Washington, DC, to enact the Main Street Fairness Act by July of next year!

We would also like to send our most sincere (and hopefully not premature) congratulations to all of our affiliate friends and supporters in the state of California!

[UPDATED 9/10 @ 6:30 AM PDT]  The new Section 6 represents the substantive amendment to AB155:

SEC. 6.

  1. (a) Sections 1 and 2 of this act shall become operative on the effective date of this act.
  2. (b) Section 3 of this act shall become operative on either of the following dates:
    1. If federal law is enacted on or before July 31, 2012, authorizing the states to require a seller to collect taxes on sales of goods to in-state purchasers without regard to the location of the seller, and the state does not, on or before September 14, 2012, elect to implement that law, Section 3 of this act shall become operative on January 1, 2013, and Section 2 of this act shall become inoperative on that same date.
    2. If federal law is not enacted on or before July 31, 2012, authorizing the states to require a seller to collect taxes on sales of goods to in-state purchasers without regard to the location of the seller, Section 3 of this act shall become operative on September 15, 2012, and Section 2 of this act shall become inoperative on that same date.
  3. (c) The Director of Finance shall, on or before August 15, 2012, certify in writing to the Governor, the Senate Committee on Rules, the Speaker of the Assembly, and the State Board of Equalization whether or not federal law has been enacted on or before July 31, 2012, authorizing the states to require a seller to collect taxes on sales of goods or services to in-state purchasers without regard to the location of the seller.
  4. (d) For the period between June 28, 2011, and the effective date of this act, state law regarding the imposition and collection of use taxes, including, but not limited to, any reporting requirement imposed on a seller, shall be administered and applied in accordance with state law as it read on June 27, 2011.

SEC. 4. SEC. 7. This act is an urgency statute necessary for the immediate preservation of the public peace, health, or safety within the meaning of Article IV of the Constitution and shall go into immediate effect. The facts constituting the necessity are:

In order to lessen the burden at the earliest possible time on small businesses that are otherwise required to collect use tax, it is necessary that this act take effect immediately.

In order to clarify and confirm at the earliest possible time the obligations of certain retailers to collect use taxes from California purchasers, it is necessary that this act take effect immediately.


California’s latest twist in sales tax battle will hurt local retailers in favor of a certain online auction site

August 27, 2011
Los Angeles Times

Los Angeles Times: New online sales tax legislation

According to a Los Angeles Times article, the next move in the battle over California’s online sales tax collection law comes from supporters:

A coalition of giant, brick-and-mortar retailers and their legislative allies have come up with a new strategy to try to head off Amazon.com’s referendum to overturn the state’s new Internet sales tax law.

On Thursday, lawmakers amended a bill in the Senate Appropriations Committee and sent it to the full Senate for a vote next week. If the bill gains approval from the Senate, the state Assembly and the governor, its passage would have the effect of nullifying Amazon’s current drive to qualify a referendum for the June 2012 budget.

To recap the situation thus far: A law requiring online retailers with California affiliates to collect sales tax went into effect on July 1. Amazon immediately dropped its affiliates in California, and on July 8 the company filed a petition to put a referendum to repeal the law on the ballot, for California voters to decide on. The petition was approved, and since then Amazon has been campaigning to collect the 505,000 signatures needed to put the referendum on the ballot.

And  now it seems that supporters of California’s legislation have made the latest move. According to the LA Times, “Passage of a new law would supersede the old law, making the referendum invalid.”

Apparently the new bill raises the small seller exception—where the previous law exempted online retailers with less than $500,000 in annual remote sales from collecting sales tax, the new one raises that threshold to $1 million. That change was enough to get a certain online auction company to drop its opposition to the law, so legislators are more optimistic about its chances.

Believe it our not, this latest escalation of the small seller exception is as dramatic as it is surprising. The economic impact of this change will be significant, however the lawmakers in Sacramento seem to have glossed over that fact:

…add an urgency clause, and increase the small business exemption from $500,000 to $1 million. Staff notes that BOE does not track micro-level data on affiliates that may be subject to the exemption, so the fiscal impact related to increasing the threshold in indeterminable. (emphasis added)

Are they serious? They think it’s indeterminable? Affiliates have nothing to do with the revenue collection, it’s the retailers that collect, not the affiliates. This statement is pure misdirection. I expect Ms. Betty Yee and quite a few analysts at the Board of Equalization would dispute that they could not calculate the loss of revenue, and the legislature should immediately review some of their recent findings on the subject (like this and this).

This amendment blatantly discriminates against small local main street retailers who are not afforded any such exception—proper tax policy should treat all retailers and taxpayers equally. Surely there are a few local retailers who would love to not have to collect the sales tax on their first $1 million in sales. For a bit of perspective on this matter, let’s listen to Amazon’s own Mr. Paul Misener in his testimony before the United States House of Representatives in 2006

To be sure, no one expects truly small businesses to do the work of sales tax collection alone but that doesn’t mean they shouldn’t be required to do it at all. By analogy we require small business persons to sign their legal documents in ink but we don’t expect them to make their own ballpoint pens.

Amazon.com will offer sales tax collection services to our small seller customers. I am sure that our on-line competitors also can and will. Of course, this discussion so far as been limited to small businesses conducting interstate sales. What about small main street businesses selling locally? Even after a decade of e-commerce, as Brian [Bieron of eBay] has pointed out, still over 90 percent of retail sales are off line.

Small main street businesses already collect sales tax and, thus, have both the administrative burden of tax collection and the higher prices caused by it. If out of state small businesses would not have to collect, then their main street brethren would be saddled with a competitive disadvantage both as to burden and price. Hopefully policy makers never would conclude that this disparity would be fair to main street small businesses. (emphasis added)

We couldn’t agree more.

We continue to believe that all this contentiousness is unnecessary. Energy would be better spent on federal legislation on online sales tax collection—which Amazon and lawmakers support. It solves many other problems, too. To quote from ourselves:

As states such as California and Illinois enact affiliate nexus legislation (so-called Amazon tax laws) to attempt to collect sales tax due on online purchases, small businesses across the country are being caught in the crossfire. Affiliate marketers are forced to either find entirely new sources of revenue or flee to another state. Meanwhile, online retailers that rely on affiliate marketing are forced to either eliminate their established sales and marketing teams or come into compliance with the new laws.

The better solution is the anticipated Main Street Fairness Act, which incorporates the Streamlined Sales and Use Tax Agreement (SSUTA). SSUTA streamlines and simplifies state sales tax regulations, making it easy for retailers to collect sales tax for multiple states. SSUTA is the cooperative effort of 44 states (including California and Illinois), businesses, political leaders, and industry associations. States that adopt SSUTA have committed to make sales tax collection easier for all retailers, online and offline, large and small.

We hope that the Main Street Fairness Act will soon make these state battles moot. It’s the best solution for all.


Facts on Main Street Fairness Act and Streamlined Sales Tax, including job figures

August 24, 2011

We recommend our readers take a look at two sources of thorough backgrounds on the Main Street Fairness Act, the Streamlined Sales and Use Tax Agreement, and online sales tax collection in general.

A fact sheet issued by the International Council of Shopping Centers is worth reading in its entirety, but we were particularly interested in some of the statistics it includes, which we hadn’t seen before:

  • One of out every 11 U.S. jobs is shopping center-related; for every 100 individuals directly employed at regional shopping centers, an additional 20 – 30 are supported in the community due to multiplier effects
  • Each $1 million of new retail sales adds 3.61 jobs. To illustrate: 
    • $1 million in new sales at Best Buy’s average e-commerce and B&M shares is expected to create 3.47 jobs;
    • The same $1 million in new sales at Amazon’s average is expected to create 0.88 jobs.

Again, it’s definitely worth reading the entire fact sheet. The simple bulleted arrangement is surprisingly effective, and with each fact, the implicit argument for the Main Street Fairness Act becomes stronger and stronger.

The other piece is an article by Sylvia Dion at allBusiness (we blogged about an earlier article of hers on the Main Street Fairness Act). This time she focuses on the Streamlined Sales and Use Tax Agreement (SSUTA) and how it works in the Main Street Fairness Act. Unlike any other article we’ve seen on the subject, this one discusses SSUTA’s small seller exception:

One definition, not elaborated on in the legislation, but found in the SSUTA, is the small seller exception. Cory Barwick, Lead Tax Analyst at CCH -a Wolters-Kluwer business, explains that the SSUTA’s small seller exception “allows businesses with less than $500,000 in annual revenue to be exempt from the remote (out-of-state) seller collection requirement.” According to Barwick, who reports on Streamlined Sales Tax developments for SalesTaxSupport.com, “the Streamlined Sales Tax Governing Board has made many revisions to the SSUTA since its inception in an effort to entice states to become members to the agreement, including the November 2010 update to the small seller exception,” which he adds, “makes sense as these businesses are the ones that generally cannot afford the expense associated with the collection of remote taxes.”

Of course, we feel that collecting sales tax online shouldn’t cost businesses anything, which is why we’ve made TaxCloud free to all retailers. But if small businesses are concerned about the potential costs of online sales tax collection, the small seller exception should put them at ease.

Dion also makes it clear that the Main Street Fairness Act is not a nationwide “Amazon tax”:

By the way, although the proposed Main Street Fairness legislation and the state “Amazon laws” have a similar goal—to require the collection of sales tax by out-of-state sellers who do not have a physical presence in their statethe Main Street legislation is not a national “Amazon law.”  These state laws are presumptive nexus laws, meaning that if a business engages in the activity described in the law, a presumption of “nexus” arises. Nexus, an oft overused term, means that a business has established a sufficient connection to a state to allow that state to subject the business to taxation or, in the case of sales tax, to impose a sales tax collection requirement. State “Amazon laws” focus on an expanded view of nexusin essence, that the use of in-state “affiliates” who post a web-link to the out-of-state seller’s on-line store is akin to creating a physical presence in the state.
But the Main Street Fairness legislation makes no mention of nexus. What’s key here is that states must be full-member SSUTA states in order to have the right to assert a collection requirement on out-of-state sellers. Essentially, the use of in-state “affiliates” that refer customers to an out-of-state seller via a web-link becomes irrelevant under the Main Street legislation.

In other words, under the Main Street Fairness Act, there would be no need for retailers like Amazon and O.co (formerly Overstock.com) to drop their affiliates—no need for states to pass sales tax laws focused on affiliates in the first place.

We have to disagree with Dion on one subject, though. At the end of the article, she asserts that the Main Street Fairness Act doesn’t have bipartisan support. We disagree. While the official sponsors of the bill are Democrats, numerous Republican politicians have voiced their support for this legislation—among them, Senator John Boozman, Tennessee Governor Bill Haslam, and Indiana State Senator Luke Kenley. There is absolutely nothing partisan about the Main Street Fairness Act—it doesn’t create a new tax or raise taxes; it simply ensures all retailers follow the same sales tax rules; and it gives states complete control over their own sales tax laws—and we believe that we’ll see more and more Republicans voicing support for the bill in the days to come.


New York Times: Amazon takes on California

July 14, 2011
The New York Times: Amazon Takes on California

The New York Times: Amazon Takes on California

The New York Times just published an article covering the AMZN proposed referendum to repeal ABX1 28.

One part, which we are now investigating, really caught our eye:

Amazon said this week that it would push a voter initiative in California that could eliminate sales tax for virtual sellers with only a modest physical presence in the state. (emphasis added)

We hope that the voters of California don’t get tricked into thinking the referendum would actually repeal the sales tax itself. Regardless of the outcome of this proposed referendum, if a “virtual seller” refuses to collect sales tax, consumers will still owe it—just as they have in California since 1935 (no, that is not a typo).

All-in-all, it is a well-written and thorough piece, but we wish the writers had pointed out the fact that with federal legislation, such as the much anticipated Main Street Fairness Act (MSFA), states could legitimately repeal affiliate nexus laws (no voter referendum necessary) while simultaneously generating significantly more revenue. This is because the MSFA would authorize states (those that have simplified their sales tax laws by adopting SSUTA guidelines) to compel remote retailers to collect sales tax at the time of the transaction. This would allow states to collect the approximately $23 billion in sales tax that goes uncollected each year (nearly $1.7 billion in California alone).

We will let you know what we learn about the “eliminate sales tax” quote.