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Get Ready To Collect Taxes On Online Sales

New York State's court victory forcing Amazon to collect sales tax will not immediately lead to your company having to collect sales tax on sales across the country, but you had better believe the writing is on the wall. Selling online is about to get a lot more complicated.
New York State's court victory forcing Amazon to collect sales tax will not immediately lead to your company having to collect sales tax on sales across the country, but you had better believe the writing is on the wall. Selling online is about to get a lot more complicated.As of now, the ruling applies only to Amazon and Overstock.com in New York. But given the overall economic conditions and how badly states want to boost revenue, it's only a matter of time before all Internet transactions are taxed just like brick and mortar sales.

So if your company sells online and out of state, it's time to start planning how you're going to deal with this. Because it turns out collecting sales tax online can be more involved than you might think.

Here's how we got to this point. Historically, while customers owe sales tax on everything they buy according to the rules of the state in which they buy it, online retailers were required to collect the tax only when they had a "physical presence" in the purchaser's state. In practice, that almost always meant that no tax was ever paid.

But New York State took a novel tack, redefining "physical presence" and telling Amazon that it had to collect taxes on purchases sold to New York State residents because the company had "affiliates" in the state who earned fees for sending buyers to the Amazon site. Amazon sued to block the requirement, but this week a New York State judge dismissed Amazon's suit (Overstock.com, which dismissed its "affiliates" when New York demanded the tax money, plans to appeal.)

In the short run, this ruling could give smaller out-of-state e-tailers an advantage in New York, because they don't yet have to collect sales tax.

But that won't last. And when the law does require everone to collect tax, the playing field will actually be tilted against smaller companies. That's because collecting online sales tax promises to be incredibly complex, with overlapping state, county, and city rules on who's responsible for what, how much should be paid, what reporting is required, and much more. And different states tax different things in different ways. For example, one state might now consider a T-shirt clothing and tax it as such, while another might consider it a sporting good and tax it differently.

To help deal with the confusion, at least 22 states are supporting the Streamlined Sales Tax Project, but others object to the hassle and expense of changing tax codes. And it's not clear how this would reconcile the issue of other taxing bodies, including various cities and counties.

And what about the issue of mobile users buying non-physical products like software or song downloads. How could you even tell what state -- or even what country -- they were in when they bought it? Think it won't get to that? New York is already looking to tax that stuff.

Oh, and did I mention that all this mess could also apply to business-to-business transactions as well?