Interstate Online Sales Tax Legalities: An E-commerce Conundrum

online sales tax
Interstate Internet taxes? What are the rules?
UPDATE: Amazon and Texas came to an agreement in 2012. The online retailer agreed to establish a presence in the state and create thousands of new jobs. The company will also begin collecting online sales tax on July 1, 2012. In exchange, Texas agreed to ignore any perceived back taxes on Amazon’s part.

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Amazon.com fired the latest shot in the battle between online retailers and state governments salivating for online sales tax revenue. On January 9, 2011, Amazon filed suit against Texas. Texas demanded $269 million in unpaid Internet sales taxes, but Amazon fired back with a lawsuit claiming that the state failed to provide an audit.

Due to it’s cross-state sales volume, Amazon.com has long been the scourge of state governments. The company claims it only has to pay online sales taxes on purchases made in nexus states (i.e., states in which Amazon.com has warehouses or offices). State governments, on the other hand, claim that sales tax must be paid to states in which the purchases were made (effectively, all of them).

Why is this a big deal beyond tax revenue? Since Amazon.com hasn’t been paying sales taxes in every state, it’s been able to undercut the prices of brick-and-mortar businesses — which has spiraled into unemployment and under-employment problems.

What The Amazon V. Texas Online Sales Tax Battle Means For Other States

This fight stabs at the heart of heart retail. For brick and mortar stores, profits are linked to their physical presence. However, Amazon.com does all of its business through the postal system, with physical properties in just four states (at the time of this writing): Kansas, Kentucky, North Dakota, and Washington; so it only pays sales taxes in these locations (as well as New York, which passed a law in 2008 stating that out-of-state sellers must pay sales tax).

The main legal questions that arise in the Amazon v. Texas levy debate:

  1. Are online retailers, internet marketers and e-commerce businesses considered “trans-state actors,” or should they be subject to state sales taxes, like brick and mortar businesses?
  2. Would tax law have to be rewritten to hold online retailers to the same rules as traditional stores — and would it be constitutional?

Will Amazon Fight Hard?

Previously, when faced with similar state legal actions — like in Colorado and Illinois — Amazon simply severed ties with affiliate marketers in the state. Amazon’s game of chicken led to the online retailer pulling out of the region entirely, prompting marketers to flee to more affiliate-friendly locales.

Industry insiders suspect that Amazon’s recent purchase of Texas affiliate company Woot prompted the recent tax audit. Instead of threatening to end ties with Woot, Amazon is questioning whether Texas can present legally viable tax figures. Texas, for its part, claims that Amazon’s distribution center qualifies as a presence in the state. However, Amazon doesn’t technically “own” many of its distribution centers.

Implications for E-commerce and Online Retailers

While Amazon’s latest sales tax gambit is a bold one, it’s yet to be seen if Texas will fold. If Texas is permitted to force sales taxes on Amazon.com, without having to rewrite laws to do so, there’s nothing stopping other state governments from doing the same.

And because state governments are unilaterally strapped for cash, they aren’t likely to let the issue slide. If the states win, the e-commerce industry will lose its sales tax advantage over brick and mortar stores.

For more information about interstate online sales tax issues, contact an Internet law attorney.

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