Wednesday, July 13, 2011

Amazon v California - sales tax on internet sales

A Staring Match for the Future of Affiliate and Internet Marketing

For many years, now, people have been talking about sales tax on Internet sales.  I’ve heard and read about it in various forms.  Scare tactic viral emails have crowded my inbox telling me to write my congressman about bills that haven’t existed yet.  Politicians have debated the need to tax internet sales.  Bla, bla, bla.

For a long time, Internet sales have handled taxes the same way that old-school mail order catalogs did.  That was that there were no sales taxes charged, unless the order originated from within the same home state as the business.  If I’m a business in Utah, and someone else in Utah orders from me, I was required to collect and pay sales tax on internet sales based on that sale to that customer.  On the other hand, if someone from New York bought from me, I didn’t have to collect New York state sales tax.

That has caused a lot of problems over the years, especially as internet business has grown.

See, sales tax is a state thing.  The money is collected by the states, and managed and spent by the states.  Each state decides how much sales tax they’re going to charge, and on what kinds of products.  Some states don’t charge any sales tax.  So, if someone from New York buys from someone in Utah, then, technically, that’s New York’s problem, not Utah’s.

A lot of states have come up with some interesting ways of taking care of this.  In theory, everyone in New York should keep track of all of their internet, mail-order, and out of state purchases, itemize that list on their state income taxes, and pay their New York state sales tax..  Most people, obviously, don’t do this.  Here in Utah, for example, the state has an option for you to just pay an estimated out-of-state sales tax, added into your state income tax form.  It’s easier and quicker than tracking all of your purchases, and it’s not exorbitant, so  most people just pay it.

However, as the internet has grown a bigger and bigger presence in the commercial world, it’s becoming a force to be dealt with.  States are seeing online sales take a bite out of their retail sales tax revenues, and want to bite back.  Several states have passed laws dealing specifically with sales tax on internet sales.

The problem for internet retailers becomes bigger and bigger with each new state law.  They have to update their shopping cart softwares and their accounting procedures to handle each new state’s tax rules and rates uniquely.  It’s becoming very problematic.

The crux of many of these new laws is that the retailer has to have a presence in the state in order for the state to force them to pay sales tax on internet sales.  The way the states are getting around this in the new laws is by declaring that affiliates, who advertise for the big sites and get commission payouts, constitute that presence.  Amazon disagrees, and rather than sink all that money into revamping their online checkout procedures and accounting processes to adapt to each state, they’ve simply pulled out of the states that are passing these laws.  Affiliates in many states, like California, Connecticut, Texas, South Carolina, and others, are finding accounts closed.

What does all this mean for internet entrepreneurs?

On an immediate level, you’ll need to pay closer attention to your state’s laws.  If you’re in a state where certain kinds and sites of affiliates are limited, you’ll need to be aware of that and choose affiliate programs that are still available, and willing to conform to your state’s sales tax on internet sales laws.

Ultimately, it’s going to force the hand of the federal government, and they’ll have to step in and set some uniform and hopefully reasonable sales tax for internet sales.  They’ll have to work out who gets the money from those taxes, however, and that battle will be hard fought.  Will it go to the home state of the buyer, the seller, the manufacturer, or the shipper of the product?  Or even  remain with the feds?

In the long run, you’ll need to pay close attention to bills being proposed in your state legislatures, about sales tax on internet sales, and make your own voice heard. Haunt your state legislature’s website.  Be aware.  Contact your representatives (state and federal) and find out what’s being debated.  Let them know how you want them to vote, and remind them that you also vote.

The next few years will be very interesting.  Be a part of it in your state.


Mark is currently coaching internet entrepreneurs.

Mark also has other sites and blogs, including Mark's Black Pot - Dutch Oven Recipes, and his MoBoy blog.