Colorado’s online sales tax reporting requirements law finally killed

April 7, 2012

A federal judge has finally issued a permanent injunction on Colorado’s 2010 online sales tax reporting requirements law, which called for all online retailers to report purchases made by Colorado residents to the state’s Department of Revenue. A temporary injunction against the law was issued last year just before the reporting requirements would have gone into effect.

In his ruling, Judge Robert E. Blackburn looks at the precedent set by the 1992 Supreme Court case Quill v. North Dakota, which mandated that out-of-state retailers did not have to collect sales tax even as it recommended that Congress address the issue—which, of course, it has yet to do.

Blackburn writes:

Quill puts states like Colorado in a difficult position. The state cannot require out-of-state retailers, retailers with no physical presence in the state, to collect and remit sales tax on sales those retailers make to residents of Colorado. Residents who make purchases from those retailers are obligated to pay use tax on those purchases, but enforcing the use tax is significantly more difficult than enforcing the sales tax. Seeking to enhance enforcement of the use tax on those who make purchases from out-of-state retailers, a state understandably looks to the out-of-state retailers for key information that can enhance enforcement. However, if the state has a mandatory sales tax system, as does Colorado, enforcing a reporting requirement on out-of-state retailers will, by definition, discriminate against the out-of-state retailers by imposing unique burdens on those retailers. Such a system imposes a differential burden on out-of-state retailers because the different burden is imposed precisely because the retailer is an out-of-state retailer entitled to the protection of Quill. Quill creates the in-state versus out-of-state distinction, and the dormant Commerce Clause prohibits differential treatment based on that distinction. Only a change in the law by the Supreme Court or action by Congress can change this situation. Quill, 504 U.S. at 318 (“Congress is now free to decide whether, when, and to what extent the States may burden interstate mail-order concerns with a duty to collect use taxes.”) (emphasis ours)

It’s worth repeating: “Only a change in the law by the Supreme Court or action by Congress can change this situation.”

Our readers may be surprised, given our support of states’ efforts for online sales tax collection in general, that we agree with Judge Blackburn—on his overall ruling, the fact that Quill makes the current situation difficult for states, and his assertion that only federal action, not state, can remedy the situation.

State after state has tried to increase the collection of sales tax on online purchases, but only a federal law, like the Marketplace Fairness Act, can overcome the limits set by Quill—or, more precisely, can exercise the interstate commerce authority reserved for Congress via the (dormant) Commerce Clause.

One other interesting point: Colorado doesn’t include a line on its income tax return form for reporting and remitting sales tax on online purchases. The reason given? That “the amount of tax collected did not justify the printing expense.” We have to think that, while that may have been true in 1974, it wouldn’t be true anymore, and it does seem like a reasonable measure to impose until Congress acts on online sales tax collection.

But the inclusion of this fact in the ruling leads us to another question. The ruling says that “there are at least three reasonable nondiscriminatory alternatives” to reporting requirements that could also increase the collection of sales tax on online purchases: the line on income tax returns, increased auditing of businesses, and consumer education and notification programs aimed at increasing compliance.

What about the other states that have already implemented these, that include the line on income tax returns, have increased business audits, and created consumer education programs—and still have not seen satisfactory compliance with its sales tax laws? Would these states be permitted to implement reporting requirements?

Other ideas in the ruling make us think not, but better legal minds than ours may be tempted to try. We still oppose reporting requirements, primarily because they are an invasion of consumer privacy, but we wouldn’t be surprised if another state, fed up with lack of action by Congress, decides to try this approach.

The best course of action, as we have been arguing for a long time, is for Congress to pass federal legislation allowing states to require online retailers to collect sales tax, for many good reasons.


California is on fire (for sales tax)!

June 2, 2011

Earlier today the California Assembly passed AB 153, the so-called “affiliate nexus” legislation. This development comes on the immediate heels of the Assembly’s approval yesterday of AB 155.

To review:

AB 153 would require any out-of-state retailer to collect California sales tax if that retailer pays click-through commissions  to any California business in excess of  $10,000 $500,000  annually (note: revised upward 3 days ago). AB 153, if approved by the State Senate and signed by Governor Brown, will mandate that any website link advertisement (where compensation is paid if a sale is completed) is the legal equivalent to a door-to-door salesperson—invoking the sales tax collection obligation provisions of the Supreme Court’s 1992 Quill decision.

As many of our regular readers know, many web-based businesses regularly display commission-bearing advertisements on their websites. Perhaps more troubling than the typical “Amazon.com” affiliate relationships that have been in the news so much lately, consider the possible impact of this legislation on California companies, such as eBay. EBay’s entire business is based upon receiving a commission upon completed sales. If AB 153 becomes law, potentially every eBay seller could be required to collect California sales tax if they sell (or even market) any products to just one California resident. We expect this may explain the sudden huge jump in the “occasional sales” exception threshold.

Seriously though?! Is $500,000 annually really an “occasional seller“? That must be one heck of a garage sale!

Meanwhile, AB 155 is now focused entirely on mandating that so-called “sister companies” based in California establish sufficient nexus for out-of-state “parent” or “sibling” companies to be required to collect California sales tax. Our regular readers may recall that AB 155 was initially introduced as reporting requirement bill, very similar to Colorado’s legally embroiled reporting requirement law, HB 1193. Fortunately AB 155 has been amended several times since then to eliminate the more troublesome reporting obligations and achieve its new form. Although, as it is worded now, it would seem quite likely to cause affected out-of-state retailers with investments in California businesses to simply withdraw those related entities from the state entirely. While we are sure there are numerous examples of such entities, Lab126 (the developer of the Kindle for Amazon) comes immediately to mind.

While we appreciate and respect California’s need to fix the current imbalance related to sales tax collection obligations, which costs the state over $1.1 billion annually, we sincerely hope those entrusted to do the people’s work in Sacramento recognize that this matter must ultimately be resolved in Washington DC.

Under the Supreme Court’s 1967 National Bellas Hess vs. Illinois Department of Revenue ruling, the ability of states to compel remote or out-of-state businesses to collect local sales tax hinges on minimizing (or eliminating) burdens implied by such an obligation. In its majority opinion (now forty-four years ago), the Court ruled that

the many variations in rates of tax, in allowable exemptions, and in administrative and record-keeping requirements could entangle National’s interstate business in a virtual welter of complicated obligations to local jurisdictions.

So, unless and until California directly addresses these three points of undue burden, attempts to compel remote retailers to collect will not likely survive litigation and judicial review.

Fortunately, California has been working with 43 other states on the Streamlined Sales and Use Tax Agreement since 2000 —a system that alleviates all of these burdens (and is FREE for retailers to implement). Governor Brown and the California legislature should urge California’s delegation in Congress to sponsor and work to pass the federal Main Street Fairness Act, which would eliminate the need for California to venture into such controversial interpretations and extensions of the concepts of nexus and would finally enable California to require out-of-state retailers to collect sales tax, just as any local retailer is required to do.


In South Dakota, it’s the thought that counts

March 23, 2011

The South Dakota legislature today signed into law SB146, which includes certain notice requirements for retailers that do not have nexus in South Dakota. It’s aimed at increasing the collection of sales tax on remote (online and mail order) purchases and is similar to laws enacted by Oklahoma and Colorado.

Specifically, South Dakota’s law requires online and catalog retailers that do not collect South Dakota sales tax to display a notice to consumers informing them that sales tax is due on the purchase (unless the transaction is tax-exempt). The notice has to be posted on the retailer’s website or catalog and on the customer invoice. Retailers and auction websites with less than $100,000 in annual sales to South Dakota are exempt from complying with the law.

Section 9 of the law leaves us puzzled, though—it states, “No criminal penalty or civil liability may be applied or assessed for failure to comply with the provisions of this Act.”  Huh?

Even without penalties, the intent of the law is clear: South Dakota, like many other states, is willing to explore every means available to increase the collection of taxes that are already due.

We believe that retailers should be concerned about the growing (and frequently confusing) patchwork of state affiliate laws and notification requirements. Federal legislation will solve this problem once and for all, and we can’t help but wonder if all this state action is deliberately aimed at ensuring such legislation comes quickly.


Affiliate nexus law enacted in Illinois

March 11, 2011
Wall Street Journal: Amazon Takes Action in Illinois as War on Sales Taxes Continues

Wall Street Journal: Amazon Takes Action in Illinois as War on Sales Taxes Continues

Today’s decision by Illinois governor Pat Quinn to sign HB 3659, affiliate nexus legislation, confirms that states are willing to try anything to narrow the budget gaps they face. The drawbacks to such legislation are well-known: loss of income for affiliates and the potential for extensive litigation (as New York has been experiencing for the past three years).

Amazon has already announced its decision to cancel its relationships with Illinois affiliates, as reported in this Wall Street Journal article. Other online retailers are expected to follow suit.

The bright spot for Illinois-based affiliates is that other large retailers—those who already collect sales tax online due to their brick-and-mortar presence—have offered to step in. Barnes & Noble, Wal-Mart, Best Buy, and Sears are among the retailers that have reached out to Illinois affiliates. Also, the Stand with Main Street organization has begun a new “matchmaking” service to pair affiliate marketers that have been dropped by Amazon with other retailers.

We hope Illinois will soon join its neighboring states and join the Streamlined Sales and Use Tax Agreement (SSUTA). Illinois senator Dick Durbin is expected to introduce the Main Street Fairness Act in Congress any day now. Once enacted, that law will enable SSUTA states to require online retailers to collect the sales tax that is already due on all online purchases.


California introduces “affiliate nexus” and Colorado-style reporting legislation

January 19, 2011

Yesterday (January 18) two assembly bills were introduced in California that should catch the attention of every retailer on the internet. (Update 1/20/2011 @ 5:16 AM – AB 153 and 155 “may be heard in committee 2/18/2011″)

Assembly Bill 153, introduced by Assembly Member Nancy Skinner, is a form of legislation frequently referred to as an “Amazon tax”—we tend to refer to it as “complex nexus” legislation because, well, it is complex! It involves unilateral state-by-state legislation designed to redefine the concept of substantial nexus (i.e., “place of business”) to single out internet-based affiliate network businesses. Specifically, AB 153 suggests expanding the definition of a  “retailer engaged in business in this state” to include:

Any retailer entering into an agreement or agreements under which a person or persons in this state, for a commission or other consideration, directly or indirectly refer potential
purchasers of tangible personal property to the retailer, whether by an Internet-based link or an Internet Web site, or otherwise, provided that the total cumulative sales price from all of the retailer’s sales, within the preceding 12 months, of tangible personal property to purchasers in this state that are referred pursuant to all of those agreements with a person or persons in this state, is in excess of ten thousand dollars ($10,000).

In addition to AB 153, Assembly Bill 155 was introduced the same day by Assembly Member Charles Calderon. AB 155 proposes the adoption of burdensome new notice and reporting requirements, similar to those adopted last year by the state of Colorado. The important changes include:

     

  1. In administration of the use tax, the board may require the filing of reports by any person or class of persons  having  in  his or their possession or custody  of  information relating to sales of tangible personal property,  the storage, use, or other consumption of which is subject to the tax. The reports shall be filed when the board requires and shall set forth the names and addresses of purchasers of the tangible personal property, the sales price of the property, the date of sale, and such other information as the board may require.
    1. Every person that sells tangible personal property, the storage, use, or other consumption of which is subject to use tax, that is not registered with the board, shall annually file with the board a report that sets forth the names and addresses of purchasers of the tangible personal property, the sales price of the property, the date of sale, and other relevant information as may be required by the board.
    2. Paragraph (1) shall not apply to a person whose receipts from sales described in paragraph (1) are less than five hundred thousand dollars ($500,000) in the prior calendar year, and are reasonably expected to be less than five hundred thousand dollars ($500,000) in the current calendar year.
    3. Each person required to comply with paragraph (1) shall be subject to a penalty of ten dollars ($10) per violation for each name of a purchaser that was not included in the report for each annual period. If the board finds that a person’s failure to comply with paragraph (1) is due to reasonable cause and circumstances beyond the person’s control, and occurred notwithstanding the exercise of ordinary care and the absence of willful neglect, the person shall be relieved of the penalties provided in this paragraph.
    1. Each person required to comply with paragraph (1) of subdivision (b) shall annually send a notice to each purchaser showing the total amount of purchases made by that purchaser in the prior calendar year. The notice shall inform the purchaser of the obligation to file the appropriate sales and use tax returns. The notice shall be sent separately to each purchaser, by first-class mail, with the following notice contained on the exterior of the envelope: “Important Tax Document Enclosed.”
    2. Each person required to comply with paragraph (1) shall be subject to a penalty of ten dollars ($10) per violation for each purchaser to whom notice is not sent. If the board finds that a person’s failure to comply with paragraph (1) of this subdivision is due to reasonable cause and circumstances beyond the person’s control, and occurred notwithstanding the exercise of ordinary care and the absence of willful neglect, the person shall be relieved of the penalties provided in this paragraph.

We sincerely hope California legislators will reconsider these steps.

Regarding HB 153, we feel it is simply unwise to attempt to build a system of taxation based purely on a retailers’ chosen marketing practices—because they will simply discontinue those practices.

Regarding HB 155, we believe it will be challenging to enforce such excessively burdensome reporting requirements on retailers, particularly because they may violate consumer privacy protections in the state of California.

We recommend that California seriously consider enacting sales tax legislation to bring California into compliance with the Streamlined Sales and Use Tax Agreement (SSUTA).

The SSUTA initiative—which involves a multilateral, forty-four state coalition (including California) that has been working for over ten years to modernize and simplify sales tax codes—creates a single, workable approach for all merchants to collect sales tax for all states. SSUTA is designed to simplify and standardize sales and use tax laws (including standard definitions for taxable goods, tax holidays, and rate change notices), with the goal of enabling any out-of-state sellersto easily comply with local sales tax initiatives. Moreover, unlike the concept of complex nexus, SSUTA is also based upon and supported by an extensive body of regulation and case law surrounding sales and use tax jurisdiction and liability. As we have pointed out, California has been a contributor to the SSUTA effort since its earliest days; they just haven’t taken the next step of updating their state sales tax codes to conform to the Agreement. (Twenty-four states have already updated their sales tax codes, and Missouri recently introduced legislation to join the SSUTA as well.)

As regular readers of this blog know, FedTax.net is a Certified Service Provider under the SSUTA and is optimized for the needs of small merchants. Our TaxCloud service is provided at no cost to merchants, and only minimal integration is required. While our system enables accurate determination of local sales tax under any approach, we believe the SSUTA model is best for taxpayers, businesses, and states.

We sincerely hope that legislators in California will recognize that HB 153 and 155 are interim measures that will not solve this problem in a meaningful way over the long term. We urge California to instead move toward becoming a full SSUTA member state and supporting federal legislation (the Main Street Fairness Act), which we expect will be reintroduced in Congress shortly.


All aboard!?

June 30, 2010

Originally posted 1/22/2010 – Last UPDATED 6/30/2010Wow, there has been a lot of activity in individual States over the last few weeks after the State of New York reported generating $53 million in new sales and use tax revenue from the 30 companies ensnared by their Complex Nexus legislation (often referred to as the “Amazon” Tax – as we have written about before). While Rhode Island and North Carolina passed similar legislation last year, they have not reported how successful their efforts have been. Amazon.com ceased all affiliate operations in RI & NC based upon their adoption of these laws. Amazon has not ceased affiliate operations in New York, but has been engaged in an ugly court battle to challenging the validity and constitutionality of the law. California and Hawaii also considered (but did not pass) similar legislation late last year.

41 States have already identified significant budget shortfalls, projecting the worst budget shortfall ever! Our friends at The Center on Budget and Policy Priorities just released a detailed (and terrifying) report outlining a projected $194 billion deficit for 2010, and another $180 billion deficit for 2011.

As of this writing four states five states (just added Vermont) seven states (just added Maryland & Illinois) eight states (added California) nine nineteen states (just added Connecticut) added a bunch more have considered some sort of sales (use) tax legislation:

STATE BILL INTRODUCED EFFECTIVE TYPE SUMMARY STATUS
ALL (FEDERAL LEGISLATION) HR5660 7/1/10 Main Street Fairness Act Gives states the right to require remote sellers to collect sales tax.  States must be members of the Streamlined Sales and Use Tax Agreement. Introduced into Congress by Rep. Delahunt (D-MA).  Has supporters from both the Democratic and Republican parties, as well as support from states.
Arkansas Entity Isolation Existing legislation prohibits merchants from practicing entity isolation (i.e. claiming that web operations and store operations are unrelated). Entity isolation legislation in effect.
California Entity Isolation

Notification

Existing legislation prohibits merchants from practicing entity isolation (i.e. claiming that web operations and store operations are unrelated).

Separate legislation has been considered to require merchants notify CA purchasers during checkout that they may owe Use tax.

Entity isolation legislation in effect.  The proposed new legislation on Notification passed the Senate 2/18/10 but failed to make it into final budget package.
Colorado HB1193 1/20/10 1/1/10 Notification

Reporting

Requires online retailers to provide CO purchasers with a summary warning on web site and invoices and requires retailers to report this information to the state annually.  Also requires retailers with over $1 mill annual sales to send a 1099-type notice to the customer.  Retailers can avoid these requirements by collecting the sales tax. Signed into law 2/24/10.  Affiliate Marketing rules were considered but not included in the final law.
Connecticut RB5481 3/8/10 Affiliate Marketing ($2,000 threshold) Died in Committee 5/5/10
Florida SB2552 Other Proposes FL allocates money to build software requiring credit card companies to collect sales tax. Unlikely to pass.
Georgia SB512 3/17/10 Contingency Fees Authorized GA to pay contingency fees to lawyers to sue retailers to enforce collection obligations. Passed Senate 3/26/10
Illinois SB3353 Affiliate Marketing ($10,000 threshold) Bill ‘held over’.
Indiana Entity isolation Existing legislation prohibits merchants from practicing entity isolation (i.e. claiming that web operations and store operations are unrelated). Entity isolation legislation in effect.
Iowa HF2510 3/1/10 Affiliate Marketing Died in Committee 3/2/10.
Maryland SB824 Died in Committee before the end of the 2010 legislative session.
Mississippi SB2927 1/20/10 Affiliate Marketing ($0 threshold) Died in Committee 2/2/10
New Mexico HB50 1/15/10 Affiliate Marketing ($10,000 threshold) Died in Committee 5/3/10
New York 6/1/08 Affiliate Marketing ($10,000 threshold) NY reported that it generated $53 million in new use tax from the 30 companies affected by its Affiliate Marketing law. Signed into law April 2008
North Carolina 4/23/10 Affiliate Marketing Signed into law in 8/5/09.
Oklahoma HB2359 1/5/10 7/1/10 Notification Requires retailers to post a notice to OK residents on the checkout page that they may be liable for use tax, and to disclose this on the invoice. Signed into law 5/28/10.
Rhode Island 7/1/2009 Affiliate Marketing ($5,000 threshold) Signed into law 6/30/09
Tennessee SB1741, HB1947 3/19/09 Affiliate Marketing

Notification

Died in Committee 4/20/10
Vermont HB661 1/29/10 Affiliate Marketing ($10,000 threshold) Died in Committee.
Virginia SB660 1/21/10 Affiliate Marketing ($10,000 threshold) Died in House subcommittee 2/24/10


Please Note:  The information provided on this web site is intended to stimulate discussion about sales tax issues affecting online merchants.  While we make every effort to provide accurate information, readers should refer to their own tax counsel, state and local laws and other source documents for more detail.

All of this activity at the state level should provide ample indication to our Senators and Representatives in Washington D.C. that federal action is necessary to prevent a flood of varied state-by-state laws. Urge your Senators and Representatives to ask around on the hill, and find out what is holding up introduction (and passage) the the Main Street Fairness Act!

Here at Fed-Tax.net we are eager to help all Internet merchants easily and automatically calculate and remit correct local sales tax for every jurisdiction in the United States – at zero cost to merchants. We will do this regardless of which system ultimately prevails, state-by-state affiliate taxes, or a federally authorized Streamlined Sales and Use Tax Agreement.

Our TaxCloud service will launch later this year (watch here for our preview release announcement soon), and will demonstrate beyond any shadow of doubt that it is no longer overly burdensome (technically or financially) for remote sellers to comply with all local sales tax laws. We are building TaxCloud to activate the opinion of the Court as originally penned by Justice Stewart in 1967 (and re-affirmed in 1992) which invited congress to act once “the skill of contemporary man and his machines” has solved this problem.

UPDATE – COLORADO SB 1193 2/2/2010: Last night the Colorado House of Representatives voted (on “Shall the bill pass?”) 33 (Yes) to 32 (No). So, they PASSED SB 1193 – Here is the Current (Amended) Bill now on its way through the Colorado Senate.

UPDATE – VERMONT HB 661 Introduced 2/3/2010: Just saw that Vermont also introduced their own version of an affiliate tax late last week. Sorry we missed it.

UPDATE – Colorado SB 1193 Revised 2/8/2010 – the Colorado Senate has revised SB 1193 significantly.

UPDATE – Maryland SB 824 Introduced 2/10/2010

UPDATE – Illinois SB 3353 Introduced 2/10/2010

UPDATE – California Senate passes AB 8 2/18/2010

UPDATE – Colorado SB 1193 is now LAW – The Governor of the State of Colorado – see Emergency Regulation 39-21-112.3.5.

UPDATE OKLAHOMA HB2359 is now LAW. It requires retailers to post a notice to OK residents on the checkout page that they may be liable for use tax, and to disclose that information on any invoice sent to the customer.


Ladies and Gentlemen… Start Your Engines!!!

May 11, 2010

Rumors abound that a certain piece of legislation might be introduced this Thursday!

Increasing state-by-state efforts to recover uncollected sales taxes due for most Internet purchases are creating an increasingly hostile compliance burden on multi-state retailers. If you didn’t think the budget problems were enough to encourage federal action on this matter, perhaps this growing body of state-by-state legislation (such as the so-called “Amazon Taxes,” and aggressive reporting requirements) is enough to compel federal action due to the Commerce Clause of the United States Constitution.

Not to mention, our new TaxCloud service (launching July 1) will eliminate all previous concerns related to undue technical or financial burden (its FREE!) as cited in the 1967 Bellas Hess opinion as the only reason for exempting Remote Sellers from their obligations to collect local sales tax. Bellas Hess anticipated technology could eventually solve the administrative burdens of calculating and remitting local sales taxes for every jurisdiction in the land, but even then only Congress has the ability to grant States interstate collection authority. FINALLY, after 43 years, Congress should now act.

As we like to say here at Fed-Tax.net “Shop Globally, Support Locally!”