Internet Sales Tax; a mistake waiting to happen?

Last month the media outlets were buzzing about another State legislature looking into ways to impose a form of Internet sales tax on out-of-state merchants doing business in Hawaii. Several of the articles noted that last year similar legislation passed in the State of Colorado leading one of the world’s largest Internet merchants, Amazon.com, to drop its affiliates and advertisers in Colorado.

Now, syndicated columnist George Will reports “how the ‘Amazon tax’ backfired in Illinois.” Mr. Wills cites an Illinois businessman who picked-up his entire fifty four (54) employee company (FatWallet.com) and moved it just five miles north, across state lines, to set-up shop in Wisconsin. Will’s cites the company owner’s reason for the move was an effort to save his business and avoid being dropped by Amazon as an affiliate.

Wills goes on to explain that an important reason why Internet sales have been so brisk over the years has been a 1992 U.S. Supreme Court decision which established the “substantial nexus” test. Tax lawyers point out that Wills is referring to the Quill Corp. vs. North Dakota case (at 504 U.S. 298 (1992)), in which the U.S. Supreme Court dealt with some of the confusion about how the Due Process and Commerce Clauses affect sales taxation. The case sought to clarify the terms “minimum connection” and “substantial nexus”. Quill is still recognized as the leading case regarding “substantial nexus.”

Following the Quill decision, the State of Texas served up a $269 million dollar sales tax bill to Amazon based on it’s nexus with the State. Thereafter, Amazon decided to close its Texas warehouse, thereby eliminating the “nexus” it had with Texas, and avoid paying taxes from the company’s Internet sales. In essence proving what tax attorneys and others have been saying for years, that business will go where they can avoid smothering taxes and burdensome regulation.

Meanwhile, large “brick and mortar” competitors like Target and Wal-Mart have band together and formed the Alliance for Main Street Fairness to lobby for an Internet Sales tax. These merchants assert Internet retailers enjoy an uneven playing field thereby resulting in unfair competition and hurting local-based businesses. Internet retailers’ counter by pointing out that traditional “brick and mortar” businesses use State services like police and fire, while Internet companies without a physical presence in the State derive no benefit from the State’s services and therefore shouldn’t have to pay taxes.

IRS lawyers and other tax experts list a host of problems associated with taxing Internet retail sales and fully expect most of these new sales taxing efforts will be fully tested in the Courts for years to come. Although it has not become an issue yet, such a move could end-up creating a lot of extra work for tax attorneys. Internet-based retailers could easily find themselves owing several States back taxes, or getting in trouble for failing to comply with reporting requirements (much like an individual might have unfiled returns and be subject to interest and penalties).

If you are an Internet retailer and have questions about sales tax, or any other tax related concerns, you should consult a competent tax lawyer and get the answers you need. Recognized this is a developing area of the law and there aren’t a lot of clear answers right now. That is why a tax attorney can be so important to your future business planning.

 

Segal, Cohen & Landis
9100 Wilshire Blvd. Ste. 601E
Beverly Hills, CA 90212
(310) 285-3999

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