November 3, 2010, 12:10 PM

An e-commerce tea party

With states on the prowl for revenue, e-retailers should be wary of promising tax-free sales.

Well, not exactly a party, but as in the political movement sweeping across the country, it’s a no-punches-pulled effort across several states to help balance budgets—in this case by eking out as much tax revenue from e-commerce sales as possible.

It’s too soon to say how several state efforts to force sales tax collection on online sales will pan out in the courts, but one thing is clear since New York State enacted in June 2008 what’s become known as the Amazon Tax: Other states are continuing to think of ways that they can force the sales tax collection hand of online retailers. In recognition of that trend, a large number of our readers checked out this recent article we published about an effort by Texas to recoup what it says are more than a quarter of a billion dollars in sales tax that Amazon.com should have collected and remitted to the state: “Amazon.com gets a Texas-sized tax bill.” 

Amazon has requested a redetermination of the Texas Comptroller’s Office decision, which claims that the retailer has a physical presence in the state—and therefore a duty to collect sales tax from Texas customers—with the Amazon.com kydc LLC distribution operation, which Amazon considers an entity separate from its main retail organization. Tax and legal experts say U.S. business law generally accepts distribution operations in separate entities as separate from a retailer’s core selling operations for tax purposes, but Texas apparently thinks otherwise. And it will be interesting to see whether Amazon succeeds in its challenge to the state comptroller’s determination.

And you can bet other states are watching what happens in Texas, just as they watched what happened in New York before similar “Amazon Tax” laws popped up in states including North Carolina and Rhode Island.

States have their reasons: According to the National Conference of State Legislatures, they could collect enough new revenue, about $19 billion, this year alone to cover about 27% of their budget shortfalls—enough to fire the flames of any tea party movement.

The overall message here for e-retailers is to be aware that the hunger for tax revenue among states has long legs, and more efforts to force tax collection on the part of e-retailers are sure to arise.

In recent years, many multichannel retailers saw the writing on the wall in the growth of cross-channel shopping to move away from operating separate entities for online and offline sales as a means to avoid having nexus in several states and the responsibility for sales tax collection. A good follow-up to that might be to reconsider promoting many online sales as “tax free” to shoppers, when by law consumers who don’t forward sales tax payments to retailers are required to pay it directly to the states themselves as a “use” tax. Few do, of course, but that only pushes states like North Carolina to force online retailers to hand over information on shoppers in order to help identify those who don’t pay their use taxes.

Another recent article notes how Amazon.com won a decision against North Carolina on this issue—“Amazon wins one in court

but the judge also left the door open for the state to continue seeking information on consumers as long as it stays within consumers’ First Amendment rights.

This e-commerce tea party is not ending any time soon.

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