In 1992 the Supreme Court ruled in a case about mail order that a state could not charge sales tax on an out-of-state company unless that state had sufficient nexus within that state. The gold standard since then has been a brick and mortar presence. Companies with physical stores in a state charge sales tax on online purchases for that state while companies without physical stores do not.
In 2008, New York passed a first of its kind law that expanded the definition of nexus to include companies with affiliate ties to that state. The statute stated that if a company received business through referrals from New York affiliates, then that company had sufficient presence within the state to be charged sales tax. Since 2008, eight states have passed their own versions of New York’s law, Rhode Island, North Carolina, Colorado, Illinois, Arkansas, Hawaii, Connecticut and California. For the most part in these states, e-retailers like Amazon have responded by discontinuing their affiliate programs rather than charging sales tax.
Currently Vermont, New Mexico, Massachusetts, Missouri and Minnesota are all considering affiliate tax bills of their own. Meanwhile South Carolina and Texas have given Amazon in particular, the online retailer that has become somewhat of the flagship in this debate (they have sued to have the New York law declared unconstitutional and are sponsoring a ballot measure to repeal California’s law) special protections against sales tax to encourage the company to build facilities within their states and bring jobs.
The 1992 Supreme Court ruling left open the possibility for Congress to pass new laws, to set new rules for interstate commerce, thus allowing mail order and online retailers to be required to collect sales tax. For several years now a proposal for this has waxed and waned in popularity and exposure, something called the Streamlined Sales Tax Agreement. The idea is that states join the Agreement and agree to abide by some common rules for sales tax in exchange for the ability to collect sales tax on out of state retailers. The biggest push in support for this measure has come most recently from Senator Dick Durbin (D-IL) who has introduced the Main Street Fairness Act into the Senate. It would provide official Congressional support for the SSTA and would allow it to go into effect once 10 states approved it.
Perhaps most importantly, online retailers like Amazon and Overstock.com have put their support behind Senator Durbin’s initiative, arguing it is the fairest resolution to the current debate.
For more information on the affiliate tax, other sales or use tax issues, or for assistance with any tax law concern, contact Horowitz & Weinstein.
Horowitz Law Offices
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Chicago, Illinois 60654