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The State of the Amazon Tax, Fall 2013

  • Oct 23, 2013 | Gail Cole

 The answer is worth millions.

Is it okay for states to impose a sales tax collection obligation on remote retailers who do not have a physical presence in the state? That’s the million dollar question, and the answer means the loss or gain of millions of state sales tax dollars.

Many states (Colorado, Georgia, Illinois, Maine, Minnesota, New York, Texas…) have tried to enact such a requirement through the relationship remote retailers have with affiliates located in the state. States have had varying degrees of success. Michigan lawmakers are currently considering such a requirement, and the governor of Ohio rejected one last summer.

These Amazon Tax laws, as they are often called, vary in detail but seek the same outcome: tax revenue. Under them, businesses making a certain amount of sales in the state (often generated by in-state affiliates) are required to collect and remit sales tax or help spread the word on use tax.

The world’s largest online retailer—Amazon—has gone to the mat with several states over its namesake laws. It has complied with some, ignored others, and taken some to court. It has also artfully sidestepped the issue by establishing a physical presence.

Physical presence

A physical presence unequivocally triggers a sales tax obligation. Amazon currently collects sales tax in Arizona, California, Georgia, Kansas, Kentucky, New Jersey, New York, North Dakota, Pennsylvania, Texas, Virginia, Washington, and West Virginia. It has some sort of physical presence in all of these states: fulfillment centers, offices, or subsidiaries.

Amazon began collecting sales tax in Virginia on September 1 and in West Virginia on October 1, 2013. The etailer will start collecting sales tax in Wisconsin next week (November 1) even though its new distribution center in Kenosha won’t open until late next year. There is talk of a new distribution center in Florida and the fact that Amazon will eventually commence sales tax collection in the Sunshine State. Amazon is scheduled to begin collecting sales tax in South Carolina, where it has a physical presence, in 2016, and in Indiana and Nevada at the start of next year.

Picky, picky

But when “An Act Concerning the Collection of Sales Tax by Any Business Making Sales to Persons in Maine” took effect earlier this month, Amazon severed its relationship with Maine affiliates rather than add Maine to the list of states where it collects sales tax. The giant online retailer responded in kind in Minnesota and Missouri. There is surely a strategy behind which laws Amazon fights, which it accepts, and which it simply ignores like an unlucky prom date (for a while it wouldn’t even get Georgia a cup of punch).

Use tax

Some states take a different approach, imposing use tax notification requirements rather than a sales tax collection requirement. Tennessee, Kentucky and South Carolina require out-of-state retailers that do a certain amount of sales in the state (like Amazon) to notify their customers of their use tax obligation. The Amazon website specifies that customers located in South Dakota, Vermont, Oklahoma, and the three states listed above, “may have additional tax requirements.”

See you in court

Amazon took New York to court over the state’s affiliate nexus law, and other states have found themselves in court over similar laws:

  • Illinois: The Illinois Supreme Court ruled last week that the state’s click-through nexus law was discriminatory;
  • Colorado: The 10th Circuit Court of Appeals recently ruled that Colorado’s Amazon tax law, which has been suspended since the Direct Marketing Association (DMA) took the state to court, should be reinstated. That reads like a victory for supporters of remote sales tax. However, the DMA has vowed to “lodge a legal challenge in Colorado district court”, and so long as the law is being challenged, the state cannot require remote retailers to collect sales tax or even notify customers of their use tax obligation. The Department of Revenue first needs to receive the ruling from the district court.
  • New York: Amazon and Overstock challenged New York’s affiliate nexus law, taking it all the way to the state Supreme Court. After the state won, the businesses requested the case be heard by the United States Supreme Court. As of yet, the high court has not decided whether or not to hear the case.

The fact that the Illinois State Supreme Court nixed the Illinois Amazon tax and the New York Supreme Court approved the New York Amazon tax may increase the likelihood that the United States Supreme Court will eventually become involved--especially since the Illinois decision involves a federal law (the Internet Tax Freedom Act).

A federal solution

Amazon supports a federal solution to the remote sales tax issue. The United States Senate approved such a solution—The Marketplace Fairness Act of 2013—back in May. Congress has yet to take up the measure, although Chairman of the House Judiciary Bob Goodlatte (R-VA) has taken the first step toward framing the discussion. Careful now.

What to do

In these uncertain times, the best response is one of action. It’s time to consider how an automated sales tax solution can help handle expected and unexpected sales tax changes.

Sales tax rates, rules, and regulations change frequently. Although we hope you'll find this information helpful, this blog is for informational purposes only and does not provide legal or tax advice.
Gail Cole
Avalara Author
Gail Cole
Gail Cole
Avalara Author Gail Cole
Gail began researching and writing about sales tax in 2012 and has been fascinated with it ever since. She has a penchant for uncovering unusual tax facts, and endeavors to make complex sales tax laws more digestible for both experts and laypeople.