Last month for sales tax free Amazon orders in South Carolina

sales tax freeSouth Carolina reminds shoppers that Amazon orders will loose their sales tax free status as of Jan. 1, 2016.

As of New Year’s Day, South Carolina will become the 27th state to require sales tax be collected on Amazon orders. Amazon has long been aware that it will lose its sales tax free status. The deal the state’s legislature made back in 2011 with the retailer in exchange for in-state jobs expires after this month.

South Carolina expects to collect many millions of dollars once sales tax free Amazon shopping is a thing of the past. “We expect a significant increase in sales tax revenues,” said Rick Reames, state Revenue Director.

Amazon’s policy used to be to pull business out of states that tried to force it to collect sales taxes. South Carolina was among 10 states that gave Amazon a temporary tax reprieve in exchange for jobs and investment. In return, Amazon placed distribution centers in Lexington County and Spartanburg.

Even during the 4 1/2 years Amazon didn’t collect sales tax on South Carolina transactions, by law shoppers were still responsible for paying the tax not collected at the time of purchase. As per its compromise with the legislature, Amazon has e-mailed customers a yearly tally of what they’ve spent, reminding them they may owe the use tax on their income tax returns.

Even though Amazon did not share purchase information with the state’s department of revenue, use tax collections increased from $1.4 million in 2011 to $4.1 million in 2013 which the department attributes to awareness the e-mails generated.

Items sold by Amazon.com LLC, or its subsidiaries, and shipped to destinations in the following states are subject to tax:

Arizona Indiana Minnesota Ohio West Virginia
California Kansas Nevada Pennsylvania Wisconsin
Connecticut Kentucky New Jersey Tennessee
Florida Maryland New York Texas
Georgia Massachusetts North Carolina Virginia
Illinois Michigan North Dakota Washington

Note:

  • No sales tax is charged when purchasing gift cards; however, purchases paid for with gift cards may be subject to tax.
  • Items sold by Warehouse Deals and shipped to destinations in Alaska are subject to local sales tax.
  • Textbooks rented from Warehouse Deals and shipped to destinations in Delaware are subject to tax.

Colorado’s Internet tax law questioned but federal law questioned as well

On March 3rd, the U.S. Supreme Court dealt a potentially crippling blow to Colorado’s efforts to force out-of-state retailers to assist the state’s efforts to collect use taxes on Internet and mail order purchases. While the court unanimously sided with retailers opposing Colorado on a key jurisdictional question, at least one justice expressed concern that states have been unfairly restrained in taxing Internet purchases.

Direct Marketing Association v. Brohl

Colorado legislators adopted a law in 2010 imposing a number of reporting requirements on out-of-state retailers who do not otherwise maintain a physical presence in the state. First, these retailers had to inform all of their Colorado customers they were liable for use tax on their purchases. Second, retailers had to send a specific notice to each Colorado customer who purchased more than $500 worth of goods during the previous year about their use tax liability. Finally, retailers had to provide the state’s Department of Revenue with the names, addresses and total purchase amounts for each of their Colorado customers.

Colorado's internet tax law

Justice Kennedy’s assertion that it may be time to do something about the outdated Quill decision is highlighted if you look at the number of states that have attempted to enact their own version of Internet sales tax legislation.

The Direct Marketing Association (DMA), a trade group representing Internet and mail-order businesses, asked a federal judge for an injunction to prevent Colorado from enforcing this law. The judge granted that injunction in March 2012, holding Colorado’s Internet tax law requirements violated the Commerce Clause of the U.S. Constitution. Under the landmark 1992 U.S. Supreme Court decision in >Quill v. North Dakota, the Commerce Clause forbids a state from requiring retailers who do not maintain a “physical presence” within the state to collect its taxes. Here, the judge agreed with the DMA that the three reporting requirements “impermissibly imposed undue burdens on interstate commerce” and were therefore unconstitutional.

But in 2013, the U.S. 10th Circuit Court of Appeals reversed the trial judge’s decision. The appeals court did not address the merits of the DMA’s constitutional arguments. Rather, the three-judge panel said the federal courts lacked the jurisdiction to hear the case at all. In 1937, Congress passed a law prohibiting federal courts from issuing any injunction which interfered with a state government’s “assessment, levy or collection” of its own taxes. The 10th Circuit said that anti-injunction rule applied to Colorado’s Internet tax law reporting requirements.

The Supreme Court disagreed. In an opinion authored by Justice Clarence Thomas, the high court said the “notice and reporting requirements” in Colorado’s Internet tax law are not part of the tax “assessment” or “collection” process. In fact, Thomas said the reporting requirements precede both. For instance, the word “assessment” in the 1937 law refers to the act of recording a taxpayer’s liability; but Colorado’s law addresses efforts to gather information about the taxpayer’s liability. Thomas said the anti-injunction rule does not extend to such information gathering efforts.

Time to reconsider Quill?

In a separate opinion, Justice Anthony Kennedy wrote to express his personal belief the court should reconsider and overturn Quill v. North Dakota. Kennedy said requiring states to establish a physical presence (or “substantial nexus”) before imposing tax collection responsibilities on out-of-state retailers caused “extreme harm and unfairness to the States.” Kennedy said many states were struggling to collect use taxes on Internet and mail-order sales – Colorado alone loses about $170 million a year, he said – and given the “far-reaching and structural changes in the economy” caused by the online shopping revolution, he argued the time had come for the court to reconsider its position.

Kennedy acknowledged the DMA case was not the right time and place to address this issue, but he added, “The legal system should find an appropriate case for this court to reexamine” the Quill decision.

This may not be the last word

Although the Supreme Court said the anti-injunction law did not stand in the way of the trial court’s original decision in favor of the DMA, this case is not yet over. In a footnote to its 2013 opinion, the 10th Circuit suggested the legal principle of “comity” cautioned federal courts against interfering with Colorado’s internet tax law collection policies. Comity basically means that even if a federal court has the legal right to hear a case, it should decline to do so out of courtesy to the state’s authority. Colorado officials did not actually present a comity as a defense – and Justice Thomas said he and his colleagues took no position on the issue at this time – but the 10th Circuit may revisit the question following the Supreme Court’s decision.

S.M. Oliva is a writer living in Charlottesville, Virginia. He edits the international legal blog Bonham’s Cases.

Illinois trys again with click-through substantial nexus law

Illinois enact click-through nexus

Illinois is one of many states to enact a click-through nexus or “Amazon tax” law saying that merchants making sales through online marketing (grossing over $10,000 annually through clicks with affiliates in the state)  have established nexus and are liable to pay use tax even if the sales were not to Illinois residents.

Generally a state may only collect sales or use taxes if there is a “substantial nexus” between the seller and the state imposing the tax. The substantial nexus requirement arises from the United States Constitution, which gives Congress the exclusive right to regulate interstate commerce. As the U.S. Supreme Court explained in the 1992 decision, Quill v. North Dakota, before the Constitution’s adoption, “state taxes and duties hindered and suppressed interstate commerce; the Framers intended the Commerce Clause as a cure for these structural ills.”

In modern practice this means two things: first, a state cannot use its tax policies to discriminate against out-of-state commerce; second, a state cannot tax a transaction that has no real connection – i.e., a substantial nexus – to the state itself. This latter requirement is an ongoing source of tension in the age of Internet commerce, as online retailers can sell millions of dollars worth of goods in a state where the company maintains no physical or legal presence.

The “Amazon” Tax

One battlefield in this tax war is the use of affiliate or “click-through” marketing programs. Most people are familiar with these types of programs. A website contains an ad for goods available for sale at another website, such as Amazon; the user clicks the ad, purchases the product, and the affiliated website operator receives a commission from Amazon.

More and more states are contending that this advertising relationship alone creates a “substantial nexus” with an out-of-state retailer justifying the collection of sales or use tax. This past January, Illinois announced its second effort to collect such taxes. Illinois legislators made their initial attempt in 2011, asserting sales and use tax jurisdiction over any “retailer having a contract with a person located in this State under which the person, for a commission or other consideration based upon the sale of tangible personal property by the retailer, directly or indirectly refers potential customers to the retailer by a link of the person’s Internet website.”

A trade association representing affiliate marketers challenged Illinois’ action as a violation of a federal law prohibiting “discriminatory taxes on electronic commerce.” In an October 2013 decision, the Illinois Supreme Court agreed with the challengers and nullified the state law. The Illinois General Assembly responded in August 2014, passing a revised law allowing retailers to present evidence their referral activities are “not sufficient to meet the nexus standards of the United States Constitution.” The new law also applies to “promotional codes distributed through the [retailer’s] hand-delivered or mailed material,” such as catalogs. This requirement is intended to address the Illinois Supreme Court’s finding the earlier law singled out Internet-only promotions.

Under the new Illinois law, which took effect on Jan. 1, any out-of-state retailer that “made cumulative gross sales of $10,000 during the preceding four quarterly periods to customers referred by persons located in Illinois,” must register and pay state use taxes. Note the $10,000 threshold is based on the location of the affiliates, not the customers. So if an Illinois-based website’s referrals lead to $10,000 in sales for the out-of-state retailer, the retailer is liable for Illinois use tax even if only $5,000 of those sales were actually made to people living in Illinois.

click through substantial nexus

Courtesy The Tax Foundation (Graphic created circa 2009)

Internet sales tax to be discussed in committee

The Marketplace Fairness Act (MFA) will inch ever so slightly closer to debate in the House when a special committee holds its upcoming hearing on Internet sales tax issues.

Representative Jason Chaffetz (R-Utah)

Representative Jason Chaffetz (R-Utah)

“Exploring Alternative Solutions on the Internet Sales Tax Issue” is scheduled for the House Judiciary Committee at 10:30 a.m. on March 4, 2014. Jason Chaffetz, a republican representative of Utah, will explore the concepts laid out by House Judiciary Committee Chairman Bob Goodlatte (R-Va.) last September. Chaffetz’s goal for this hearing is to examine Goodlatte’s guidelines and look at ways to refine the MFA legislation’s wording (H.R. 684 and S. 743) to address opponents’ concerns and not to make any changes to the current bill at this time.

Goodlatte outlined seven basic principles that need to be attended to before interstate sales tax becomes practical:

1)      Online retailers should not face new or discriminatory taxes that brick and mortar retailers or not faced with.

2)      The burden of sales tax compliance should be equal – not easier nor more difficult – for online retailers versus brick and mortar retailers.

3)      Out of state retailers should have equal access to protest unfair or discriminatory regulations.

4)      State governments should simplify tax laws so as not to shift an onerous burden onto businesses and make compliance inexpensive and reliable, even for small businesses.

5)      States should keep sales taxes low and compete with one another so as not to disadvantage American retailers to foreign competition.

6)      States should be sovereign and not be subject to federal compliance burdens.

7)      Customer data must be private and protected.

Various factions, both pro and con on the MFA, have responded positively to Goodlatte’s principles.

The MFA seems unlikely to be brought before the House prior to this year’s midterm elections but may gain traction in the next congress if arguments against the legislation can be addressed.

Read more at Bloomberg BNA

Tennessee counties seek share of online tax collections

Tennessee online tax collectionCounty commissioners throughout the state of Tennessee are waking up to the fact that they aren’t seeing their share of online tax collections from newly collected sales taxes from online giants like Amazon. In fact, Tennessee doesn’t even have legislation in place to distribute the local option portions of the sales tax collected from out of state retailer’s sales.

Carmin Lynch, 9th District commissioner, drew up a resolution which reads “Local option sales tax is the second largest source of revenue for most local governments. The Cumberland County legislative body hereby requests that our state legislators initiate appropriate legislation to ensure that local option sales tax collected and remitted to the state of Tennessee is distributed to local governments based upon the residence and ship to address of the purchaser, who paid the tax; and further request the Tennessee County Services Association and County Mayor’s Association work with the state legislature and Department of Revenue to more equitably distribute local option sales tax collected by online retailers.”

The resolution will be sent to other county legislative bodies seeking support before it is presented to the General Assembly.

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