Friday, February 17, 2012

What's up with Internet sales tax

Standard Disclaimer: IANAL (I am not a lawyer) and this is in not intended to provide tax advice.

Michael asked in our facebook group "Is anybody doing anything about internet sales tax issues? I have been waiting for a national law to pass before worrying about it. So we are probably violating the law in states that have passed some internet sales tax law. We only pay in California where we are located."

The short answer is: Internet sales tax is sort of a stale mate issue right now.

As of today - you are only responsible for collecting on states where you have nexus. If your state has signed up to be an Internet tax law (and there are two different groups of states that have a unified tax code) you are still only liable for states that are in your states tax collection group.

You need to collect for any state where you have Nexus.

Nexus is an interesting it's Employees or operations, but not subcontrators, unless those subcontractors act like employees according to either states definition of employees. But if you use a warehouse like FBA - that's a vendor, it's still not nexus. Actually FBA is a separate company from and for that reason doesn't have nexus in the states that FBA has it's warehouses.

The big issue with Internet sales tax comes down to policing and enforcement. Small states like RI, NH, VT all want everybody else to collect sales tax. In their state - the enforcement cost vs. the return is huge - it'd be cheap to police because nothing really ships from their state, but the upside for revenue is HUGE.

States like NY, TX, CA, the revenue upside is less, plus they don't want to spend their money enforce tax laws for RI, NH, VT, anymore than they want to let the tax authorities for those states have authority in theirs.

Don't forget - some states like have no sales tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. If they're residents are going to get charged sales tax it's either going to need to get rebated, or the states are going to have fundamentally alter their revenue plans to reduce property tax, etc. Keep in mind businesses often locate in those states for specific reasons, and so what we're talking about is most likely highly politically toxic.

I was in Philadelphia a few weeks ago and stopped Independence Hall and saw where the Declaration of Independence and Constitution were signed. The tour guide told the story of the great compromise (how/why congress has two houses) and it made me smile thinking about how incredibly difficult it was going to be to get any type of Internet sales tax passed. The great compromise was reached with 13 colonies who were all less than a few years old -- we have 50 states now and none of them want the Federal government to regular or dip their precious sales tax. While there might be rumblings here or there, I'd wager it's going to be status quo for a while.

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