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On-line Retailers Need to Review Their Sales Tax Collection Obligations

February 20, 2015

What on-line retailers need to know about sales tax collection requirements.

Sales tax collection requirements for on-line retailers continue to be a hotly debated topic throughout the country. And rightfully so, at stake are hundreds of millions, if not billions, of tax dollars. Every business which makes on-line retail sales of property needs to be aware of the changing laws in this area.

As far back as 1992, the United States Supreme Court ruling that a business needs to have a physical presence in a state before they can be required to collect sales tax. This provided a relatively bright line test that businesses and tax authorities could work with. But as on-line sales exploded, together with the amount of tax at stake, states have looked for alternative legal arguments to force sellers with no presence in their state to nevertheless collect sales tax from their customers.

New York changed the game in 2008 when they were the first state to adopt what has become referred to as “Amazon Nexus”, or “click-thru nexus”. Simply put, the law provides that a business which pays a commission to independent parties located in New York for generating on-line sales will be considered to be doing business in New York and required to collect sales tax on all sales to New York customers. Such “affiliate programs” are widely used by on-line retailers to help drive traffic to their website and generate on-line sales.

Currently there are 20 states that have followed New York’s lead and adopted similar nexus provisions. California, Pennsylvania, Illinois, Rhode Island and Connecticut are among the states that have enacted some variation of “Amazon nexus”. Additional states will consider such legislation in 2015.

Federal legislation, most recently the Marketplace Fairness Act, has been proposed to attempt to bring a consistent and uniform collection standard to all the states. But this legislation died in 2014, and the prospects for 2015 are not any better. So businesses will continue to face a changing landscape of varying state nexus requirements. Failure to collect sales tax when required can be costly, on average 6% of gross sales into the state. On-line retailers should take a proactive stance and evaluate their obligation on a state by state basis.

The tax professionals at KLR have experience advising clients about these rapidly changing sales tax laws. If you have concerns about this matter you can contact us.

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