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What’s The Deal With Interstate Online Sales Tax Legalities?

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 taxes it insisted Amazon owed for previous years.

****Original Article Below****

The latest shot in the battle between online retailers and state governments salivating for online sales tax revenue was fired by Amazon.com. On January 9, 2011, Amazon filed suit against Texas. Texas demanded $269 million in unpaid Internet sales taxes in September 2010, but Amazon fired back with a lawsuit claiming that the state failed to provide an audit for that amount.

Amazon.com has long been the scourge of state governments because its cross-state sales rate is astronomical — thereby rendering the applicable tax rules murky. The company claims it only has to pay online sales taxes on purchases made in the states in which it owns property, whereas state governments claim that sales taxes must be paid to the states in which purchases were made (effectively, all of them). Because Amazon.com hasn’t been paying sales taxes in every state, it’s able to undercut the prices of brick-and-mortar businesses.

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

This fight goes to the heart of what it means to be an online reseller. Standard resellers have properties in every state, and their 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: Kansas, Kentucky, North Dakota, and Washington, so it only has to pay 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 are:

  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 business?
  2. How would tax law have to be rewritten to hold online retailers to the same rules are 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 sever ties with affiliate marketers in the state. Amazon’s game of chicken led to the online reseller pulling out of the state entirely, causing the state to lose business and jobs because marketers fled to more affiliate-friendly states.

People in the industry suspect that Amazon’s recent purchase of Texas affiliate company, Woot, was the impetus for 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.

Is Amazon taking an aggressive legal stance, or is the company simply leveraging Texas’ irregular behavior regarding the audit report. Presumably, Amazon’s hope is that demands for hundreds of millions of dollars in back taxes without a legal explanation will seem like a long-shot in court.

Implications for E-commerce and Online Retailers

While Amazon’s latest online sales tax legal gambit is a bold one, it’s yet to be seen if Texas will fold. Should Texas defend its decision and force Amazon.com to pay taxes without having to rewrite laws to do so, there’s nothing stopping other state governments from demanding that online retailers — both large and small — pay sales tax for all trans-state transactions.

Indeed, 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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