Navigating the Amazon – Internet Sales

Are you accruing a “sales and use” tax liability and don’t know it? If you market your products via the internet, you might very well be doing just that – creating a tax bill that you don’t even know is due and you won’t have the funds to pay. 

Much has been written regarding the recent sales and use tax legislation in New York, Colorado and North Carolina impacting internet sales – referred to by many as the “Amazon Tax”. While each of these states has adopted slightly different variations – they all have created quite a stir in the internet retail market. In 2008, New York imposed its will to force internet retailers to collect sales tax on its sales to New York customers when it legislated that web sites (many of which are “Amazon affiliates”) which have nexus in New York and refer customers to an out-of-state internet retailer for a fee represent an agency
relationship and thus cause the out-of-state internet retailer to have sales and use tax nexus in the state. The result – an estimated $70 million in sales taxes collected from an estimated 30 internet retailers during the last fiscal year. When similar legislation was passed in Rhode Island and North Carolina, Amazon decided to discontinue its affiliate program in those states.

More recently, Colorado has instituted a program to try and strike a balance between forcing internet retailers to collect the sales and use tax and creating a level playing field relative to the sales and use tax for in-state vendors. The Colorado program requires any internet retailer to advise their Colorado customers of their use tax obligation to the state. The advice must be in the form of a letter detailing the purchase amount(s) subject to the tax and must be mailed annually by January 31.

In addition, the envelope must include the phrase “Important Tax Document Enclosed”. In addition, this same information must be supplied to the state. Amazon’s reaction was the same – it discontinued the affiliate program in Colorado citing the burdensome nature of the requirement. North Carolina has made a similar request of Amazon – provide the list of North Carolina customers and purchases. Amazon has sued North Carolina in response.

There are two very strong arguments driving Amazon’s decision with regard to North Carolina and Colorado. First things first – the First Amendment – arguing that North Carolina’s request for purchase information for each customer violates the First Amendment, Amazon has gained support from the ACLU
which threatened to join the Amazon law suit against the state.