Many online retailers do not collect state or local sales tax on customer purchases—a significant advantage that may be in jeopardy. Large online retailers, such as Amazon.com, have defended their decision not to collect sales tax by citing a 1992 U.S. Supreme Court decision. In that decision, the Supreme Court said that a state cannot require a company to collect sales tax unless the retailer has a physical presence in the state. However, in the current economic climate, many cash-strapped states are looking for an easy source of revenue. As state legislatures seek to work around the Supreme Court’s decision and to force online retailers to collect sales tax, it is increasingly important to understand the burdens and complexities that these laws impose on online retailers.
Recently, a handful of states have passed legislation that target affiliates of out-of-state Internet retailers. The basic operation of these laws is fairly simple. The laws generally seek a link between the out-of-state online retailer, and an in-state affiliate. The in-state affiliate is often a website, operated by a third party, that promotes the online retailer’s goods or services in exchange for a fee. For many companies, affiliates provide significant web traffic to the retailer’s online site and can drive a meaningful percentage of sales. Even though the retailer does not have a physical presence in the state, if any of its affiliates have an in-state presence, the retailer may be treated as having a sufficient connection to the state by virtue of its relationship with the affiliate. Once an in-state presence has been established, the state will require the retailer to collect sales tax on all purchases within the state.
There are a few limitations however. First, the laws generally provide that the relationship between a retailer and an affiliate must surpass a minimum threshold before the association will subject the retailer to state tax collection laws. For example, in a recently passed Illinois law, affiliates do not create an in-state presence for the online retailer unless the retailer realizes $10,000 in sales from web traffic linked from the affiliate’s site. However, once this threshold is passed, the online retailer must collect state sales tax for sales to all state residents (including sales unrelated to an affiliate). Although the $10,000 threshold amount is the most predominant among legislation currently under consideration, you should consult an attorney to confirm the proper threshold and to ensure compliance with any other local requirements.
Second, many of the laws only create a rebuttable presumption of an in-state presence. Presumably, if an online retailer exceeds the $10,000 threshold for an in-state affiliate, the retailer may still rebut the presumption that it has a presence in the state. For example, an online retailer could demonstrate that the in-state affiliate did not engage in any in-state solicitation on behalf of the retailer.
Because the legal landscape is constantly changing for online retailers, staying informed about state legislation in this area is crucial. A change in a state’s law (where the online retailer has an important affiliate) can create additional accounting and tax remittance burdens for the retailer. If a company has affiliates across many states, the retailer may be forced to determine if the costs of complying with a given state’s sales tax law is worth the revenue earned from sales to that state.
If you are uncertain about your status as an online retailer, or the status of an affiliate, you should consult an attorney for professional advice in this fast changing area of law.