A recent article mentioned that Amazon has distributed instructions to its employees identifying which states to avoid visiting for and on behalf of Amazon; until further notice, only non-business travel to these ‘problem’ States is permitted. The sole purpose of this directive by one of the world’s largest Internet retailer is avoidance of sales taxes. Ultimately, the issue of whether and when an Internet retailer is required to collect a sales tax will be decided by the courts, and the growth of Internet consumer fireworks sales makes the outcome highly relevant.
By way of background, retail sales taxes were introduced to offset the precipitous collapse of real estate tax revenues during the Great Depression. States shifted a portion of their tax revenues to a sales tax primarily due to relative ease of collection by the merchant and verification by taxing authorities. Sales and use taxes have become so widespread that over 8,000 state, county and city jurisdictions throughout the U.S charge a use or sales tax on goods and some services. It may come as little surprise to find that some states are more dependent upon sales and use taxes that other states; for instance, Texas receives the bulk of its revenue from sales taxes, not income taxes. Other states with low income taxes have aggressive sales and use taxes. Given the fact that the combined average tax rate exceeds 8.5%, states have a strong incentive to guard this revenue stream and, in this time of depressed property values, expand its coverage.
Simply stated, a sales tax is a levy that various states place upon goods (and some services) purchased from a business that has a physical presence in the same state as the customer. By distinction, a use tax is a compensating tax imposed by states to collect taxes on sales which do not actually occurred in their state. The use tax is meant to insure that all purchases are taxed, whether purchased locally or out of state; for example, purchasing a car in a state other than your state of residence does not, contrary to popular belief, permit avoidance of the sales tax. The rule is that the purchaser is required to remit the use tax in the event that the vendor is a non-resident and, thus, outside the reach of that state’s jurisdiction and any obligation to collect a sales tax. To summarize, either the vendor collects the sales tax or, alternatively, the customer is obligated to remit the corresponding use tax for using the article in his/her state of residence. However, Internet vendors are increasingly collecting the tax on the customer’s behalf.
Internet sales have, generally speaking, evaded the obligation to collect a sales tax on sales to out-of-state residents since a business located in one state is not required to collect sales or use taxes on behalf of a different state unless they are ‘doing business’ in the other state. In order to be found to be ‘doing business in another state’ – triggering the duty to collect sales tax – the business must have a substantial physical presence in the state where the customer resides (e.g., business office or facility, mailing address, phone number, salespeople, substantial sales). Importantly, Internet, catalog, and mail-order retail operations are sufficient to support personal jurisdiction, even though the company has no physical presence in the state. As Internet marketing and retail activities evolve and become more sophisticated (the creation of a “virtual store”), and targeted, a retailer may be found to have “consistent and substantial pattern of business relations” (although it has no physical presence) sufficient to confer personal jurisdiction over the out-of-state business (e.g., L.L. Bean). Targeted marketing to residents of a specific state will likely increase the odds for a finding of ‘doing business’ and, therefore, subjecting the business to jurisdiction in states where you have no physical presence.
In conclusion, the concept of sales and use taxes seems simple but, in reality, it is highly complicated and fact-specific. However, there are methods to reduce your exposure to obligations to collect these taxes as a retailer in connection with sales to out-of-state residents.