Many Internet-only retailers do not collect sales tax on their sales except in a few states where they have a physical presence or nexus. Amazon.com may be the largest of them all and certainly must be the most well-known, but by no means are they the only ones. There are many online sellers large and small who do not collect sales tax everywhere they ship product. Internet sellers have generally followed Amazon’s lead and taken the position that since they don’t have physical presence, they don’t have “substantial nexus” and therefore states can’t force them to be tax collectors. States have struck back with a variety of so-called “amazon laws” attempting to assert that these online sellers do in fact have at least a type of physical presence through so-called “click-through affiliates” and other agents in the state.
Online-only sellers usually collect tax in just a few states. This contrasts sharply with traditional retailers that have “brick-and-mortar” stores. These traditional retailers who also make substantial sales online (see walmart.com, bestbuy.com, etc.), almost universally collect taxes on their online sales. And with an estimated $170 billion dollars in online retail sales in 2010 according to the National Retail Federation, It’s become a huge issue. It’s a big deal for states starving for revenues and for small/local as well as large/international companies who may or may not be collecting tax on online sales.
Not collecting tax has made Amazon a target of state revenue departments and their traditional retail competitors. State revenue departments face a tremendous pressure to stem the tide of falling tax revenue. Brick-and-mortar competitors large and small are also bringing the heat to the politicians. These self-styled “main-street” businesses who do collect tax but face what they feel is the unfairly subsidized competition from online sellers want their legislators to level the playing field. Keep in mind that the prominent online retailers like amazon.com and overstock.com are only the tip of the iceberg. There are many more businesses who sell online but don’t collect taxes in most states. Amazon gets all the attention, but any change in the nexus laws hits all the smaller retailers as well. In fact, it hits them much harder in terms of cost of compliance. Compliance costs are pretty much fixed or not very variable, so the cost of compliance is relatively small for a large online seller and relatively large, even bordering on prohibitive for a smaller online retailer.
What Are The Online Sellers Best Arguments?
If you’ve been following the issue of nexus for online-only retailers, you know that they make two primary arguments. First, they argue that complying with the sales tax law in all these jurisdictions is just too complicated and administratively burdensome. The other argument is that they don’t receive any governmental services in states where they have no physical presence. Both arguments have been persuasive in the courts. That first argument is in jeopardy and Amazon may be accelerating its demise.
In the past, courts have held that the sheer complexity of complying with the myriad sales tax rates and rules in so many jurisdictions is by itself an unconstitutional impediment to interstate commerce.
National Bellas Hess and Quill
Let’s back up before we move forward. The argument of complexity and administrative burden was a key in two US Supreme Court cases – in National Bellas Hess, and Quill Corporation. First, in 1967 the Supremes ruled in favor of National Bellas Hess and against the Illinois Department of Revenue. Essentially the court explained that Bellas Hess, a mail-order retailer, who had no physical presence in Illinois, could not be made to collect sales taxes there because such a requirement would create an unfair burden on the company. In the court’s words:
The many variations in rates of tax, in allowable exemptions, and in administrative and record-keeping requirements could entangle National’s inter-state business in a virtual welter of complicated obligations to local jurisdictions with no legitimate claim to impose a fair share of the cost of the local government.
Jumping forward to 1992, a situation very similar to Bellas Hess emerged in Quill Corporation v North Dakota. In this case as well as in Bellas Hess, the court upheld that a company must have a physical presence in a state before a tax collection responsibility could be imposed. The court also explained that final authority over the regulation of interstate commerce rested with Congress. In their words, “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.”
Amazon and every other online seller has relied largely on these two cases in justifying not being required to collect sales taxes. Their reliance has been well-placed. These are U.S. Supreme Court cases and since Congress has failed to act in establishing federal laws on sales tax nexus, these cases represent the law of the land. Complying with the sales tax laws in every jurisdiction has been extremely burdensome. Amazon has continued to make that argument even just recently. Consumer Reports quoted Amazon CEO Jeff Bezos as saying, “Our point of view is that we should simplify the sales tax system, and we’ve been insisting on this for 10 years…sales tax is very complicated.” So powerful has been that argument that states have gone to extreme measures to remove it as an issue. In fact, defeat this argument has been a primary reason why many states have banded together and formed the Streamlined Sales Tax Project.
Primary Argument May Be Losing Steam
Amazon has effectively led the charge for all online sellers so far in taking the heat. Their steadfast refusal to collect tax has emboldened many an online seller to do likewise. But now times are a-changing and Amazon appears to be changing direction in dramatic fashion.
Amazon just recently announced their new plan to help their affiliates cope with the complexity of collecting sales tax. Beginning February 1, 2012, Amazon’s new tax collection service will go online and the company will offer to collect and remit their affiliates’ sales taxes for them, all for a mere 2.9% additional fee. In one sense, this is no big deal. It’s typical of Amazon just to continually innovate and improve. They have seen that their affiliates were having difficulties coping with sales tax collection and set about to figure out a way to help them. In fact, Amazon has been doing this already for some time. They’ve actually been collecting tax for certain affiliates in every state for years. So this “new” plan is maybe nothing really new except they are just seeking to make tax collection a profit center.
But in another sense, this announcement of the new service in and of itself just blows the whole cover off the argument that complying with the sales tax is just too complex or administratively burdensome. It’s quite a departure from the Amazon of the past or even the Amazon of just a few months ago that went so far as to ax its California affiliates program and initiate a referendum on the state law requiring online retailers to collect sales tax. The announcement of the tax collecting plan was not missed by their brick-and-mortar competitors nor by state revenue officers.
Jason Brewer, a spokesman for the Retail Industry Leaders Association said, “It’s hypocrisy of the highest order. Now they’re trying to profit from collecting sales tax everywhere else, while still digging in their heels from collecting for their own company (as quoted in the LA Times in an article entitled “Amazon offers to serve as a tax collector - for a price”). In the same article, George Runner, a member of California’s State Board of Equalization, the agency that administers sales tax said simply, “This is what smart business people do. They are going to use whatever model they can to expand their business opportunities. They’re very slick at it.”
What Does All This Mean?
The decision reached in Bellas Hess, and then again reinforced by Quill, provides if a retailer is to be taxed, there must be an established physical connection to the taxing jurisdiction. Only Congress has a right to change that standard. Since Amazon had been such an ardent supporter of these decisions, the recent decision to begin collecting taxes effectively erodes their argument that the system is too complex, and too much of a burden. They have now basically said that not only is the system not too complicated, but it’s simple enough that we’ll do it for all our affiliates and make a profit doing it.
Take away one of the two primary arguments online-only sellers had working in their favor and we can imagine the pendulum swinging in the states’ direction. Online-only sellers will face some costs trying to comply with relaxed nexus standards.
How Difficult/Costly Is Sales Tax Compliance?
Improvements in communications technology and software solutions give taxpayers many options to help them become compliant with state tax law. There are some excellent and surprisingly cost-effective solutions available. In our 20 years of consulting with companies in sales and use tax matters, we have worked with just about every service providers in the sales/use tax automation space and we’re very encouraged at how they can help our clients. We help companies by giving them our honest feedback on solutions we’ve seen.
We see this as a big deal. Amazon has been a leader in many respects and certainly in the sales tax world for online-only sellers. They may still be leading the charge, but the direction of the charge appears to have changed dramatically and it may be to the detriment of many smaller online sellers. If smaller online sellers suddenly have to start charging tax everywhere, the cost to them will be significant. Online sellers had some good arguments, and one of their best was that it was excessively burdensome and costly to comply. Amazon is saying it’s not difficult at all to charge and collect sales tax and that may be true, at least for the larger companies like Amazon. But it hurts the prospects for smaller online sellers. Could this be the catalyst for Congress to finally act? The pendulum appears to be swinging in the states’ favor, but only time will tell.