Internet Sales Tax Legislation

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Over the years, states have attempted to impose sales tax collection responsibility on out-of-state retailers.   As laid out in numerous court cases over the years, states cannot impose sales tax collection responsibility on a retailer unless the retailer has “nexus” with the state.   For this purpose, nexus has meant means some physical contact or connection between the retailer and the state such as having business assets, employees, or offices in the state.  In the past, merely contacting customers by phone, mail, internet or traveling salesmen has not been enough to impose sales tax collection responsibilities.   This worked to the advantage of out-of-state retailers who did not have to charge and collect sales tax, and to the disadvantage of traditional brick and mortar retailers located within the taxing state.  Big retailers with stores all over the country like Wal-Mart, Best Buy and Target have been required to collect sales taxes when they sell products over the Internet. But online-only retailers like eBay and Amazon have not been required to collect sales taxes except in states where they have offices, distribution centers or other physical presence.


But all that is changing.  The US Senate has sided with traditional retailers and financially strapped state and local governments by passing legislation that would subject online-shopping to state sales tax.


Internet giant eBay is leading the fight against the legislation, along with lawmakers from states with no sales tax and certain anti-tax groups. The bill's opponents say it would put an expensive obligation on small business because they are not equipped to collect and remit sales tax to many different state and local governments at many different rates.   Under the legislation, businesses with less than $1 million in online sales would be exempt.   But eBay wants to exempt businesses with up to $10 million in sales or fewer than 50 employees.


Many governors, both Republicans and Democrats, have been lobbying the federal government for many years for the authority to collect sales tax from online retailers.  While under most state laws the consumers have an obligation to pay a “use” tax if the retailer does not collect a sales tax on their purchase, most consumers do not comply.  And it is not generally cost-effective for the states to chase individual consumers for use tax on small purchases.


This issue continues to grow as more people make purchases online.  Last year, Internet sales in the U.S. totaled over $226 billion according to government estimates.  States lost a total of $23 billion last year because they could not collect taxes from out-of-state retailers.  Supporters say the bill makes it relatively simple for Internet-only retailers to comply.  States are required to provide free computer software to help retailers calculate sales taxes, based on where shoppers live. States must also establish a single organization to receive the Internet sales tax revenue, so retailers don't have to send it to individual counties or cities.

Give me  a call or email if you want to talk about the new legislation or have any sales or use tax questions at Jsenney@pselaw.com or 937-223-1130.



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