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Insider Legal Brief:
Planning to shop online for your business needs? Read this article!
INSIDER LEGAL BRIEF: U.S. INTERNET SALES TAX - presented by Fred Reilly, Reilly International Law Firm, P. A.
The purpose of this Insider Legal Brief is to provide you with a concise explanation and analysis of a current United States legal scheme that impacts your business.
Is an internet retailer required to charge and collect retail sales tax on internet sales to American consumers?
Under current U.S. law, it depends on whether the internet retailer has a physical presence in the American state where the consumer lives.
For example, if an internet retailer maintains stores in Florida and Texas (both states with state sales taxes), the retailer would be obligated to charge and collect state sales tax on internet purchases by both Florida and Texas consumers. If the internet retailer had no physical presence in either state, they would not be obligated to charge and collect state sales tax on internet purchases by either Florida or Texas consumers.
There are several legislative initiates underway to close this "loophole" and it is likely that cash-hungry governments could dramatically change existing law in the very near future.
In addition, several states have recently passed creative laws to force internet retailers to charge and collect sales tax.
Understandably, these laws are currently being challenged in the court systems.
In a 1992 U.S. Supreme Court decision (Quill v. North Dakota), the court ruled that a mail order merchant could not be forced to charge and collect sales taxes if the merchant did not have a physical presence in the state where the consumer lived. Absent a physical presence or nexus with the state, the merchant had no obligation to collect that state’s sales tax. The rationale of this decision is also applicable to internet sales. Thus, an internet retailer is not obligated to charge or collect sales tax on purchases made by American consumers unless the internet retailer has established a physical presence in one or more American states.
A physical presence generally means a bricks and mortar store, office, warehouse, or distribution facility.
Although an internet retailer may not be obligated by current law to charge and collect a state sales tax that does not mean that a consumer is not obligated to pay the sales tax. Technically, a consumer who resides is a state that collects sales tax is obligated to pay the tax on internet purchases even when the merchant does not collect the sales tax. When the consumer is obligated to pay the tax directly to the state, it is characterized as a use tax rather than a sales tax. Recently, many tax-strapped states have significantly increased their efforts to collect use tax on internet purchases.
Both federal and state governments in the United States are exploring creative ways to generate more tax revenues. Tax advocates argue that new laws won’t impose a new tax or raise rates, but would simply make it more efficient to collect tax under existing law.
New York passed a law in 2008 (called the "Amazon law" after the internet retail giant) which redefined what it meant to have a "physical presence" in the state. Under the New York law, a company that has an affiliate relationship with another business in New York would be obligated to charge and collect sales tax on internet purchases. Thus, a company's affiliate relationship with a website owner based in New York would require the company to charge and collect New York sales tax under this law. Not surprisingly, Amazon has challenged the law and the case is currently in the court system.
Colorado recently passed legislation requiring out-of-state retailers that don't collect sales tax to provide the state government with a list of its purchasers and purchase details so that tax collectors could seek payment directly from the purchasers. This law is also being challenged in court and a decision is expected soon.
Advocates for the imposition of internet sales tax also argue that the internet sales tax "loophole" is unfair to bricks and mortar retailers who face a competitive disadvantage with internet retailers who do not charge and collect sales tax.
On the federal level, a bill was recently introduced in Congress called the Main Street Fairness Act to put online retailers on equal footing with bricks and mortar retailers. Soon after introduction of this Act, a resolution was introduced to maintain the status quo and included the language: "Congress should not impose any new burdensome or unfair tax collecting requirements on small online businesses, which would ultimately hurt the economy and consumers."
WHAT TO ANTICIPATE IN THE FUTURE
In my opinion, the Obama administration and their Democratic allies in Congress will push legislation that mandates the collection of state sales taxes on internet purchases. I don't think it's a stretch to anticipate that the Obama administration will someday seek to impose a national internet sales tax in addition to instituting a system for collecting state internet sales tax.
On the state level, the current New York and Colorado cases mentioned above are significant. If either law is upheld, you can expect other states to immediately implement similar laws. If both laws are rejected by the courts, then you can expect the states to enact other creative laws requiring internet retailers to charge and collect sales tax.
As an attorney who advises clients on eCommerce issues, the best advice that I can offer to companies that sell online to American consumers is to:
1. Understand the application of current laws to your internet business;
2. Be wary of the state laws that seek to expand the physical presence definition and circumvent the 1992 U.S. Supreme Court decision; and
3. Closely monitor future developments, especially the Obama administration's class-warfare and anti-business agenda under the guise of "leveling the playing field" and making business more "fair."
About the Author
Fred Reilly became an attorney in 1986 and is a Member of the California Bar Association, District of Columbia Bar Association, and Florida Bar Association. Mr. Reilly is also a Solicitor and Member of The Law Society of the United Kingdom.
He is admitted to practice before the United States Supreme Court and United States Court of International Trade.
Mr. Reilly graduated from The London School of Economics and Political Science (Master's degree in International Business Law), The Cumberland School of Law at Samford University (J.D.) and The Krannert School of Management at Purdue University (B.S. Management).
He practices international business and eCommerce law. Mr. Reilly frequently travels to Florida, California, London, and Moscow.
This purpose of this blog is to inform and not to advise. The statements are general and individual facts in any given situation may alter their application or involve other laws not referred to here. You should always seek advice from a competent professional if any questions arise.
Reilly International Law Firm, P. A.
P. O. Box 2039
Haines City, FL 33845 USA
Tel. (310) 927-3954
Fax. (863) 439-5077
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