The Internet Sales Tax

We first heard about the Internet Sales Tax in 2008. That was when New York first enacted its affiliate nexus law. It goes by many other names, including Internet Sales Tax and Amazon tax, mostly because was one of the first Internet retailers to get caught in this new tax trap.

How the tax works is pretty simple. The tax requirement kicks in if your business has gross sales of more than the threshold amount of $10,000 per year in a nexus state. As soon as your sales reach $10,001, you now have an obligation to collect sales tax for each sale to a customer in one of the nexus states. That means learning (and following) sales tax reporting requirements in Arkansas, Illinois, New York, North Carolina and Rhode Island.

On the other hand, it could also mean simply cancelling your affiliate relationship with marketers in those states. That’s what we have seen happen most frequently. Within a few weeks of New York’s legislation becoming law, and thousands of other Internet retailers cancelled their relationships. People who were making a good living saw their income source disappear overnight.

Amazon has also been one of the fiercest opponents of this expanded nexus definition. Shortly after the law was enacted in New York, Amazon sued the state, arguing that passive advertising activities by casual affiliates wasn’t enough to create nexus under Federal law. The state has defended its right to create tax laws within its borders and so far, the courts have sided with New York. The case is still working its way through the system, and in the meantime, Amazon is collecting sales tax under protest.

Despite the rush to cash in on Internet tax dollars, the net effect to date has not been significant. As most online retailers cancelled their affiliate programs rather than comply, there was no extra sales tax recognized. And, as people and businesses lost their source of income, income tax revenues actually declined in some states. To date, the only state to report earning any significant revenue is New York, and that money may not last if Amazon cancels its affiliate program. Because of the failure to collect revenues, and the potential negative impact on state residents, Rhode Island (one of the first 3 states to introduce an Internet Sales Tax law), has introduced legislation to repeal the law.

Even with the negative experiences of Rhode Island and North Carolina, state lawmakers remain convinced that an Internet Sales Tax is valid. In the first few months of 2011, we saw 11 states introduce affiliate marketing sales tax nexus bills: Arizona, Arkansas, California, Connecticut, Hawaii, Minnesota, Mississippi, New Mexico, South Dakota, Texas and Vermont.

Tax officials point to something called a “rebuttable presumption test” as a way for Internet retailers to escape nexus (you can read more about this test in the appendices), in an attempt to keep Internet retailers from cancelling programs. However, Amazon, Overstock and most other major online retailers have also announced plans to terminate affiliate programs in each state where legislation is passed.

Nexus is a shifting, slippery target. If you’re concerned that you may possibly have a nexus issue, we’ve got a number of products to help. Our Design Your Own Nexus Strategy product is a 140+ page eBook that talks about all aspects of Nexus, and provides handy checklists and other information to help you determine what may or may not apply to you. We’re also offering a Nexus Evaluation Program where you answer some questions and get a fully customized, detailed report on your specific nexus situation.