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The Biggest State Tax Story of 2011: Internet Sales Taxes


It's the end of 2011 and like many of you I'm reflecting on this past year - on how life has changed, how the kids have grown, and what the coming year has in store.  

But as a state tax consultant, I'm also reflecting on some incredible 2011 state tax developments.

In February of 2011, I wrote a post for AllBusiness.com in which I said (if I may quote myself), "state and local taxes are more important to business owners than federal taxes."

I added that while this comment may have surprised a few business owners, "when you consider that there are fifty states, all of which impose at least one type of tax....you're talking about some potentially significant compliance requirements."

I also noted that "while you may think your business is only subject to the tax laws of the state that you're located in, states are becoming more and more aggressive in asserting 'nexus'..." and, in an effort to deal with some of the most significant state tax budget deficits in recent history, many states were "adopting aggressive and certainly not so-taxpayer-friendly laws." 

Looking back now, these comments were a bit of an understatement! 

Little did I realize the magnitude of state tax developments that were to come in 2011 - and the potential impact these developments would have. And so, I just had to write one last post this year on what could very well be the most significant 2011 state tax development impacting small-medium sized businesses.

Certainly there's been the handful of state specific developments - like Illinois' almost doubling of its corporate and personal tax rates or Michigan revising its "business tax" for the second time in four years and enacting a corporate income tax - significant developments if your business operates in these states.
  
But as a whole, there one state tax development that really stands out as the 2011 most significant state tax development impacting small-medium sized businesses.

And that development is none other than the push to pass state and federal legislation that will require out-of-state retailers (primarily on-line retailers) to collect sales tax from customers in states in which those out-of-state retailers lack a physical presence. 

State 'Amazon Laws' Explode and the Drama Begins

During the first half of year, the focus was the states' continued efforts to enact 'Amazon Laws' - those nexus expanding laws where a mere web-link on an in-state website creates "nexus" for out-of-state retailers. (See my 12/7/11 post, "State Tax Nexus - Triggered By So Much Less Than an Obvious Physical Presence", for more on nexus)

By mid-2011, Arkansas, Connecticut, California, and Illinois had all passed 'Amazon Laws'. (See my 7/25/11 post, "Are State 'Amazon Laws' the 'New Normal'?" for more about 'Amazon Laws')
  
And these events were not without drama! For one, Amazon severed its marketing affiliate contracts in every state that enacted an 'Amazon Law'. These marketing affiliates - businesses and individuals that earn commissions from Amazon sales that originate from web-links on affiliates' in-state websites - abruptly had this source of income eliminated. For some affiliates, this loss of revenue was significant! Such was the case for FatWallet.com, an on-line coupon company that relocated its entire operations to neighboring Wisconsin just one month after Illinois passed its 'Amazon Law' in order to retain what FatWallet's CEO reported to be as much as 40% of the Company's total revenue.

But things really started getting exciting after California enacted its 'Amazon Law'. (See my 7/31/11 post, "California Enacts Explosive Amazon Law")

The events that followed had all the drama of the best written soap opera. Even after California's new law went into effect, Amazon blatantly thumbed its nose at the new law and refused to charge its California customers sales tax. Because California's 'Amazon Law' included a provision that nexus was also created when an out-of-state retailer was "related" to a California Company that performed services associated with the out-of-state's company's products (Amazon had California subsidiaries that met this definition) the Company couldn't escape the "nexus" charge by simply cutting its ties to its California marketing affiliates.

But Amazon didn't sit still - it immediately filed a petition for its "More Jobs, Not Taxes" referendum, which would allow voters to decide if the law should be permanently repealed - and the war waged on. 

By the end of September, California's 'Amazon Law' had been temporarily repealed, and Amazon was singing a new tune - saying that it would support a Federal "solution".

Congress Introduces Three On-Line Sales Tax Proposals

By the time California's 'Amazon Law" was repealed, the first of three federal "solutions" had been proposed. On July 29th, the Main Street Fairness Act was introduced by Senator Dick Durbin (S. 1452) and Representative John Conyers (H.R. 2701). The Main Street Fairness Act would give full-member Streamlined Sales & Use Tax Agreement ("SSUTA) states (there are currently 21 of them) the power to require out-of-state retailers to collect sales tax from customers in their states. (See my 8/10/11 SalesTaxSupport.com post, "Main Street Fairness Act, Is SST the Silver Bullet?" for more on this proposal and the SSUTA)

Just when it appeared as though the Main Street Fairness Act would die a slow death, a second federal proposal, the Marketplace Equity Act (H.R. 3179) was introduced by Representatives Jackie Speier (D-CA) and Steve Womack (R-AK). Like the first proposal, the Marketplace Equity Act would require out-of-state retailers to collect sales tax in states in which those retailers did not have nexus, however, this authority would not be based on SSUTA membership but on a different set of simplification requirements that states would need to meet.

But neither proposal seemed to offer an ideal solution or appeared to have the level of support needed to pass, and so Congress decided to propose a third federal "on-line" sales tax bill. The most recent proposal, the Marketplace Fairness Act (S. 1832), was introduced on November 9th by Senators Mike Enzi (R-WY), Lamar Alexander (R-TN), and Dick Durbin (D-IL) - yes, the same Dick Durbin that introduced the Senate version (S. 1452) of the Main Street Fairness Act in July.

This final proposal, like the others, would give states the authority to require out-of-state retailers to collect their states' sales tax regardless of nexus, but as a "hybrid" solution, offered two alternative sets of simplification requirements that states can adopt to qualify for this authority. States can qualify as full-member SSUTA states or can adopt the proposal's alternative set of simplification requirements.

Sylvia's Summation

There you have it - the top 2011 state tax development effecting small-medium sized businesses! Never before has the issue of whether out-of-state retailers should be required to collect sales tax on sales to customers in states in which they lack significant presence received this much attention! Will any of the federal proposals pass? Some think the time is now, others aren't so sure. But what is sure, is that the wheels have been set in motion - states are simply losing too much revenue and efforts to collect significant amounts of use tax just won't happen. (See my 11/29/11 AllBusiness.com post, "Busting the Myth of the 'Tax-Free' Cyber Monday")  But based on a November 30th Judiciary Committee hearing at which e-commerce executives from Amazon, eBay and Overstock testified, there's much that needs to be ironed out before any of the federal proposals can move forward. Perhaps one of the biggest issues, and one that will greatly impact small-medium sized on-line retailers, is that of a "small-seller exception". During the hearing, Amazon testified that a small-seller exception needs to be set as low as possible, while eBay argued for a high small-seller exception noting that the Small Business Administration's definition of "small" for an e-shopping business is $30 million. But if you think states are just sitting back and waiting for the U.S. Congress to act, you're wrong. States continue to introduce 'Amazon' legislation. Two "on-line" sales tax bills have recently been introduced by the Florida legislature, and Governor Rick Scott has already said he'll sign an internet sales tax bill into law. 

So while 2011 has been an incredible year in the state tax world, stay tuned because I predict 2012 will be even more exciting! 


Follow me on twitter at @SylviaDionCPA. Visit my company website at www.sylviadioncpa.com

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