New Mexico and Mississippi join the list of states considering affiliate nexus legislation

January 25, 2011

New Mexico representative Eleanor Chavez introduced HB 102, affiliate nexus tax legislation, on January 20, 2011. It expands the definition of “engaging in business” in New Mexico as follows:

C. A person with a business with no physical presence in New Mexico is presumed to be engaging in business in New Mexico and has nexus with the state for purposes of due process and interstate commerce if:

(1) that person enters into an agreement with an affiliate physically present in New Mexico, for a commission or other consideration, to directly or indirectly refer potential customers, whether by link or an internet web site or otherwise, to that person; and

(2) the cumulative gross receipts from sales by that person to customers physically present in New Mexico who are referred to that person by all affiliates with an agreement described in this subsection are in excess of ten thousand dollars ($10,000) during the preceding twelve-month period ending on June 30 of any year.

D. The presumption of nexus established in Subsection C of this section may be rebutted by proof that the affiliate made no solicitation in the state that would satisfy the nexus requirements of the United States constitution on behalf of the person presumed to be engaging in business in New Mexico.

In Mississippi, HB 363 was proposed by Representative Jessica Sibley Upshaw. The bill’s description is:  Use tax; provide that person soliciting remote sales through representatives in this state is subject to use tax. Specifically, “A person is presumed to be soliciting or transacting business by an independent contractor, agent, or other representative if the person enters into an agreement with a resident of this state under which the resident, for a commission or other consideration, directly or indirectly refers potential customers, whether by a link on an Internet website or otherwise, to the person.”

The list of states considering affiliate nexus tax legislation is growing longer—evidence that, absent federal legislation, states are willing to take matters into their own hands to increase the collection of sales tax due on internet transactions. It also seems that the general level of knowledge about the issues—and about the pros and cons of various approaches—is increasing. Recent editorials in two Chicago newspapers (the Tribune and the State Journal-Register) highlighted the affiliate nexus legislation passed by the Illinois House and Senate—and both pointed out the shortcomings of this type of legislation and the need for a federal solution.


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.


Forbes: EBay Sellers Shirk Sales Tax Law

July 15, 2010

Just an FYI, if you haven’t seen it already, you need to read this article by Janet Novack of Forbes.

It describes a study, “Do eBay Sellers Comply With State Sales Taxes?,”  just published in the National Tax Journal (a quarterly publication available only to National Tax Association members).

The study monitored 21,000 eBay listings posted by 7,000 sellers with 9,300 buyers over a 24-hour span. It saw $755,905 worth of consumer electronics sold, but only $60,249 of those sales were made between a seller and buyer in the same state. The study goes on to note that only 18% of sellers bothered to collect sales tax at all (in-state or otherwise).

EBay may be a little concerned, which may explain why they are opposing the Main Street Fairness Act so forcefully. EBay has taken a position in the press that the requirements of the Main Street Fairness Act would impose a crushing burden on small businesses. This is very surprising coming from a company whose business model is to provide turnkey services that enable anyone to operate a storefront with very little effort. It is hard to believe that sales tax calculation is beyond the ability of eBay to provide.

Naturally, we would be happy to help eBay easily bring their sellers into compliance with all local sales tax laws, at absolutely zero cost to eBay or eBay’s sellers.


California Legislators: “Did we say that? No we didn’t.”

May 4, 2010

California Assembly Bill 2078, introduced in February, was originally drafted to require out-of-state sellers to file reports with the California Board of Equalization detailing all purchases made by California Residents – similar to the recent Colorado Law. It also required the collection of sales tax by any retailer “having any representative, agent, salesperson, canvasser, independent contractor, or solicitor operating in this state.” This was likely worded to have a similar effect as several states’ so-called “Amazon Tax” laws (a.k.a. “Affiliate Nexus” or “Complex Nexus“).

Well, AB 2078 was quietly amended last week. Now it simply says that any retailer not required to collect sales or use tax provide notification on its web site or catalog that purchases in California “are not exempt from sales or use tax, which are required to be reported and paid by the purchaser”. Certainly a much less controversial mandate.


California Tables Amazon Tax (for now)

April 9, 2010

The Seattle Times ran a good article a few days ago discussing the California’s revised version of affiliate nexus (which has now been “tabled”), and continues into a bit of a comparison between so-called “Amazon Tax” laws and the more rational Streamlined approach.


Response: LA Times invents more Amazon Tax.

February 22, 2010

The LA Times ran an article this weekend about California ABX8 (the emergency amazon tax) – unfortunately, the LA Times does not offer a web-forum for comments/responses. The Article incorrectly states in the subtitle and in the article that the effect of this bill could result in $150 million per year in new revenue for the State of California. The fact-checker seems to have been asleep-at-the-wheel, because the actual Senate Analyses (available here) projected the revenue effect of this bill would be $107 million. Don’t get me wrong, $107 million is a lot of money, but when your state has a 14.6% budget gap, perhaps everyone should start double-checking their numbers and actually doing math. Substantially more revenue is “still left on the table” by all the other out-of-state sellers that are not collecting sales tax (hard to imagine sometimes, but there actually are other companies making sales online – about 3.5 million of them).

California should simply become a Full Member State of the Streamlined Sales and Use Tax Agreement (or SSUTA). The California Legislature already passed related legislation last fall. California now should take the remaining steps to become a full Member State under the SSUTA – a collective effort of 44 states (including California) which has been developing for the last 10 years to simplify and standardize sales tax laws to enable congressional action at the federal level to resolve this matter once and for all.

In anticipation of California’s likely ultimate adoption of SSUTA provisions, at Fed-Tax.net we have already prepared our TaxCloud systems to provide real-time calculation of accurate local sales tax for every jurisdiction in California. Take a moment to try it out at http://myrate.taxcloud.net/. Once California becomes a full Member State under the SSUTA we will be happy (and honored) to help merchants all over the country accurately calculate local sales tax for California residents. We will do this at absolutely zero cost to merchants or consumers (we are paid by the states to perform remote merchants’ sales tax management, reporting, and remittance obligations).

We know nobody likes paying sales tax, but the fact remains that this tax is still due, and when merchants do not collect at the time of sale (as they do in all physical stores), then the consumer is obligated to report and pay these taxes on their own. Since few people do, these taxes go unpaid resulting in massive budget shortfalls as California is now enduring. We think it is terrible that through lack of federal action to-date on this matter an entire generation of consumers on the Internet have grown up feeling that not being charged sales tax on Internet purchases is their constitutional right – and are frequently shocked to learn that they are committing tax fraud when they willfully or at least negligently fail to report and pay these taxes. It is time for California to tell all Internet merchants (not just those with affiliate marketing practices) that it is time for them to respect the budget decisions made by the California voters and their elected officials and to stop pretending it is too difficult, too complicated, or too costly to calculate local sales tax. Our TaxCloud service demonstrates these arguments are without merit, and these merchants are simply avoiding collection as a way to bully local merchants (who must collect sales tax) out of consumer price-competition.

California’s Projected 2010 Budget Shortfall: $ 14,400,000,000 1
AXB8 Projected Revenue: $ 107,000,000 2
Difference: $ 14,293,000,000 3

Total Sales Tax due by California consumers based on purchases from out-of-state Internet retailers

Uncollected Sales Tax (from remote sellers) $ 1,441,100,000 4

Admittedly, becoming a full SSUTA Member State will not solve all of California’s budget deficit, but at least it can cover 10% – and it is not a new tax, and no budget cuts are required.

1-Source: Center on Budget and Policy Priorities – http://www.cbpp.org/cms/index.cfm?fa=view&id=711
2 – Source: State of California Senate Analysis – http://www.leginfo.ca.gov/pub/09-10/bill/asm/ab_0001-0050/abx8_8_cfa_20100219_175402_asm_floor.html
3-Source: Simple Math
4-Source: The University of Tennessee 2009 Study: State and Local Government Sales Tax Revenue Losses from Electronic Commerce


Colorado Senate revises HB 1193 to focus on Use Tax Reporting

February 9, 2010

The Colorado Senate has revised HB 1193 quite dramatically.

The Good News: It no longer appears to be targeting affiliate marketing.

The Bad News: It makes no mention of conforming to the Streamlined Sales and Use Tax Agreement. In fact, it now goes into extraordinary detail asserting jurisdictional authority over out-of-state businesses.

Specifically, it states that any out-of-state business which does not voluntarily collect and remit Colorado sales tax must:

  1. Notify each Colorado customer that sales or use tax is due on all purchases from the business, and the purchaser must specifically file a sales or use tax return with the Colorado Department of Revenue. Failure to deliver this notification will subject that out-of-state business to a $5 penalty for each failure to notify.
  2. Send separately to each Colorado customer (by actual First-Class Mail by itself in an envelope labeled “Important Tax Document Enclosed”) an end-of-year summary showing the total amount paid by the customer for all purchases over the past year to that business, and reminding the customer again of their obligation to file a sales or use tax return and pay the appropriate use tax for all such purchases.
  3. Send to the Colorado Department of Revenue (by March 1 of each year) a statement detailing each Colorado customers purchasing activities during the preceding calendar year. Failure to send this statement shall subject the out-of-state business to a $10 penalty for each purchaser which should have been included in such annual statement.

There is also a fair amount of language devoted toward empowering the Colorado Department of Revenue the right to issue subpoena requiring attendance to take oral or written testimony under oath, and to produce all records relating to sales to Colorado residents, along with authorization for judicial enforcement and ability to order judgment against the retailer for contempt.

Holy burden building batman!

Now instead of businesses cancelling their affiliate programs in Colorado, businesses may just suspend all sales efforts in Colorado.

Please Colorado legislators – can we have a few minutes of your time to discuss this matter?

UPDATE 3/2/2010 – This was signed into LAW last week (on Feb. 24th) by the Governor of the State of Colorado.


Response to Forbes “A Flat Sales Tax?”

December 14, 2009

Forbes just published an article entitled “A Flat Sales Tax?”. We feel it would be valuable and instructive to clarify some of the points of the article which provides a brief and not entirely accurate portrayal of the Streamlined Sales and Use Tax Agreement.

While it is true that the Streamlined effort puts in place a framework to standardize rates and definitions, it in no way constructs a “flat sales tax” as the title of the article might suggest.

The article also points out that to join the Streamlined effort several current “holdout” states (New York, California, Texas, Florida, Ohio and Illinois) would have to “change some of [their] most cherished and protected means of gouging consumers.” One side effect of the Streamlined effort is its tendency to bring such practices to light, and as they are a means of “gouging consumers”, perhaps changing these practices is duly warranted.

Specifically referring to the cited examples of these holdout states surrendering exemptions for particular items (the author references “cheap clothing” and “diesel fuel for agricultural use” among a few others), the Streamlined Governing Board (which is composed of representatives from each Member State) regularly revises what is referred to as a “Taxability Matrix” to allow Member States to guide the common definitions for exemptions to be used across all participating states. This matrix and other data is ingested by services like our TaxCloud service (available free of charge in Q2 2010) so that sellers and consumers never have to think twice about whether they live in Kansas or Washington, or are buying cocoa puffs or coats.

In its current form, the Taxability Matrix absolutely allows for thresholds to be defined such that particular classifications of items below a particular price could be tax exempt, and allows for local sales taxes to be levied (or exempted) on 900 numbers, parking, and yes, even a specific definition for fur coats (Streamlined does not mandate a single category for clothing as suggested in the article).

The article continues by describing how the State of New York has gotten restless in awaiting legislation necessary for the Streamlined effort to become adopted as federal law (The Main Street Fairness Act, soon to be introduced before congress). Last year New York enacted a law which redefines the concept of substantial nexus (i.e. “place of business”) to single-out Internet-based affiliate network businesses. Forbes readers should have significant concerns about this state legislation, because it could be interpreted to include any direct response mechanism (or for that matter, any contractual relationship) as it blurs the historical “bright-line” test of physical presence to determine substantial nexus, which is why we call it Complex Nexus. We have written about this in much more detail on our Blog.

In conclusion, we feel the Forbes article is both well written, and well-considered, but we believe some clarity on a few of its points would be helpful for readers.