Almost every internet retailer asks this question at some point:
“Do I have to charge sales tax?”
You can ask the question in different ways: “Where do I have to register for sales and use tax?”; “Do I have to collect sales tax on internet sales?”; “Do I have nexus in California?” No matter how you phrase it, answering the online sales tax question is far more complex than it used to be. One of the best ways to learn how to answer this question for your business is to track how Amazon answers it. You may have a far different business than Amazon, but many states have made Amazon the focal point of new sales tax laws, and those laws impact many remote sellers.
Read on for an overview of Amazon Tax and how it impacts your sales tax obligations.
Amazon tax in 2016
Amazon currently collects tax on sales shipped to 28 states: Arizona, California, Colorado, Connecticut, Florida, Georgia, Illinois, Indiana, Kansas, Kentucky, Maryland, Massachusetts, Michigan, Minnesota, Nevada, New Jersey, New York, North Carolina, North Dakota, Ohio, Pennsylvania, South Carolina, Tennessee, Texas, Virginia, Washington, West Virginia, and Wisconsin. Many of these states have enacted click-through or affiliate nexus legislation that presumes an out-of-state seller has nexus (an obligation to collect sales tax) when certain conditions are met. These laws are designed to get the big players, like Amazon, to collect and remit sales tax. However, the laws apply to many other vendors besides Amazon.
What does click-through nexus mean for you? Click-through nexus policies require out-of-state vendors to collect and remit sales tax when they compensate residents for sales made via links on their websites. Under affiliate nexus policies, other ties to in-state businesses may trigger a sales tax obligation. Determining whether or not you have nexus in a given state can be tricky because state policies vary; for example, in California, click-through nexus is triggered if a business generates more than $10,000 in in-state sales during the preceding four quarterly periods, while in Connecticut, it’s triggered if a business generates more than $2,000 in the same time frame. You should consult with a tax advisor before entering new markets or expanding online advertising, as a mere click on a website may trigger nexus in a new state.
What about the remaining 22 states? Amazon doesn’t collect tax in the remaining 22 states, most of which don’t have click-through or affiliate nexus policies. However, Arkansas, Louisiana, Maine, Missouri, Rhode Island, and Vermont have all enacted remote sales tax laws — variations on a theme that all work to create a sales and use tax obligation for many out-of-state sellers, including Amazon. In order to avoid triggering nexus in these states, Amazon no longer permits residents to participate in its associates program.
Meanwhile, you may have to comply in these states. The Vermont Department of Taxes stresses that retailers with no physical presence in Vermont are presumed to have nexus for sales tax if they have agreements with residents to refer customers that resulted in sales in excess of $10,000 in the previous year. Amazon chose to let customers go in these states. Would you?
Perhaps the most interesting recent news regarding Amazon is not related to click-through nexus. It emerges from this statement: “Amazon will be required to collect sales tax in Washington, D.C. beginning on October 1.” The company doesn’t have a physical presence in the District, and the District has not enacted click-through or affiliate nexus. So what gives?
Neither Amazon nor the District will comment. It could be a voluntary collection on Amazon’s part — it’s made such agreements in the past, usually in states where it plans a future physical presence. And indeed, The Washington Post reports that Amazon is looking for a good spot for a brick-and-mortar bookstore in the nation’s capital. If you do business in the capital, you will want to stay tuned to see what the law means for you.
The future of online shopping: stores without walls
In the past year, Amazon has opened brick-and-mortar bookstores in Portland, Oregon, San Diego, California, and Seattle, Washington. It will soon have stores in the Boston and Chicago areas, and CEO Jeff Bezos told shareholders in May that there are plans to open more, though he provided no details. Amazon Books, a physical extension of Amazon.com, is being billed as “a store without walls.” It’s meant to combine the ease and vast selection of online shopping with the pleasurable experience of browsing the shelves.
Amazon isn’t alone. Savvy e-tailers from Birchbox to Warby Parker see the wisdom of an omnichannel approach and are opening traditional retail stores. Smaller internet businesses are also experimenting in going physical, testing markets with pop-up stores. In addition to allowing customers to see and touch and even try on products, brick-and-mortar stores can increase brand awareness and side step that “all-powerful gatekeeper”— Google.
If you’re thinking of taking your business to new channels, keep in mind it could impact your tax obligations. The more brick-and-mortar stores internet retailers open, the more places they give themselves a physical presence and an obligation to collect sales tax. For states in need of more sales tax revenue, this is good. But the trend isn’t widespread enough to satisfy states’ desires for Amazon tax revenue.
State and federal efforts
A handful of states have moved away from click-through and affiliate nexus and are instituting economic nexus policies. These posit that states have an economic need for sales tax revenue from remote transactions. This means that remote sellers may have to collect and remit sales tax in these states simply for making sales there. Economic nexus policies in Alabama and South Dakota have triggered lawsuits, and both states are prepared to argue their cases before the United States Supreme Court. If this happens, the Court could overturn Quill Corp. v. North Dakota, the 1992 decision responsible for the physical presence precedent still followed today. Learn more about economic nexus and efforts to kill Quill.
Meanwhile, federal lawmakers are striving to find a solution that will satisfy states and businesses when it comes to laws governing sales tax and remote sales. Four pieces of legislation are currently kicking around Capitol Hill: the Marketplace Fairness Act, the Remote Transactions Parity Act, the Online Sales Simplification Act, and the No Regulation without Representation Act.
A solution could be reached during the lame duck session; earlier this year, Senate Majority Leader Mitch McConnell promised online sales tax supporters a vote on the MFA before the end of 2016. But House Speaker Paul Ryan has not offered the same guarantee, and it is a contentious issue with opponents and proponents on both sides of the aisle.
Knowing where you have nexus and staying up-to-date on changing policies is crucial. Even though state laws vary widely, keeping tabs on Internet giants, like Amazon, can be a good way to see which way the tax wind is blowing. Sign up for Avalara’s newsletter to get breaking sales tax news and insights, including updates on Amazon tax.