States Try to Tax Internet Sales

In 1992, the US Supreme Court ruled in the "Quill decision" that US states could not force out-of-state merchants with no physical presence in their state to collect sales taxes on goods sold there. The case in question involved a Delaware company (Quill)  that had sold software through its catalog in North Dakota. North Dakota wanted Quill to collect and pay the state's sales taxes on the software sold in the state. The Supreme Court said no.

In-state residents in the US typically are legally required to pay taxes on their purchases (in-person, by catalog, or on-line) made out-of-state, but most residents ignore the requirement.

The Quill precedent regarding catalog sales quickly morphed into the "no sales tax on Internet sales" as long as a company has no physical presence in that state. If it does, a company must collect sales tax on its on-line products sold, just as a catalog company would have to.

State governments haven't liked this exemption for catalog sales, but they especially haven't liked it in regard to Internet sales. However, the states haven't so far been able to convince the US Congress to change the law to allow for taxation of Internet sales (or catalogs either, for that matter). While the current Congress seems more sympathetic to the idea, a number of states have decided not to wait for Congress to change the law.

In June of last year, New York state changed its definition of vendor which effectively forces on-line retailers (and anyone else for that matter) who sell more than $10,000 of goods (or services) in New York to register as a vendor and obtain a Certificate of Authority for New York State sales tax purposes; i.e., collect state and local sales taxes not only on the sales, but on shipping and handling as well.

Overstock.com said at the time that it was going to shut down its 3,400 strong New York affiliates program (i.e., folks who get commissions for referring customers to its online store), while Amazon.com said it would comply and collect the sales tax while it simultaneously fought the change in definition in court. Overstock also fought the ruling in New York courts, but they along with Amazon lost.  They are now appealing the decision.

Recently, other states including North Carolina, Hawaii and Rhode Island liked what they saw happening in New York and passed similar sales tax legislation. Others are considering following suit.  As a result, Amazon and Overstock have ended their affiliate programs in these states, and I suspect others are doing so less publicly. In fact, Overstock says it no longer does any business in the state of New York.

This Internet taxation issue is expected to become a very bitter Congressional fight as state economies continue to sour, which has increased the pressure on the states to find new sources of tax revenue, and Congress tries as hard as possible to avoid having to bail out state budget shortfalls any more than it has already. 

My guess is that it is only a matter of time before even more states follow New York's lead, Congress decides to change the law to allow for taxes to be collected on all on-line sales taxes, or states begin to demand that on-line vendors send to their respective state tax authorities the names of their customers, their addresses and any items bought that exceed some nominal amount, like $20.00.