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Amazon Tax
Posted By JaeWon Lee, Oct 21, 2013
Remember good recent days when you do not have to add any sales tax when you clicked to order your first Kindle? Things in Amazon became pricey recently – to some states’ online shoppers. In California, the company started to collect sales tax (or use tax) from September 15, 2012. California is not alone. Eighteen other states have similar laws requiring that sales tax be collected from online purchases. And, to the most, that sad reality may remain. Here is good news, at least, to Illinois residents. Just last week, on Friday, October 18, 2013, the Illinois Supreme Court struck down the state’s “Amazon tax” law that required online retailers to collect sales tax if they use in-state internet affiliates. This decision marks the first time a state court has invalidated the state’s online sales tax law as violating federal law against discriminatory taxes on internet transactions. Here is some background information about the sales tax in electronic commerce. An online retailer is not required to collect sales taxes in states where it does not have physical presence. Instead, use tax is imposed upon the purchase of tangible personal property by a resident of the assessing state for use, storage, or consumption in that state, regardless of where the purchase took place. The use tax applies when a resident of the assessing state purchases an item that is not subject to the purchaser's home state sales tax. While it is the consumer who pays the use tax ultimately, the retailer bears the burden of its collection, because it is impractical to collect the tax from individual purchasers. Note that use tax is not limited to online transactions. It applies to offline transactions equally as well, in theory. Most online retailers have contractual arrangements with online affiliates. Affiliates are not necessarily sellers themselves. They are typically website owners or bloggers who place ads for online retailers on their websites to drive traffic to the retailers. In turn, affiliates collect a commission from the retailer if a sale is made. This type of contractual relationship is known as “performance marketing.” Some states, including Illinois, have devised a way to impose use tax on online purchases by forcing online retailers to collect the tax if it has in-state affiliates, even if the retailer itself has no physical presence in that state. Illinois law required any retailer “maintaining a place of business in Illinois” to collect use tax from its customers. In 2011, the Illinois General Assembly passed, so called “click-through” nexus law, which amended the definition of a retailer maintaining a place of business in Illinois. Under the new definition, a retailer who has a contract with Illinois internet affiliates "maintains a place of bluishness in Illinois." Thus, out-of-state internet retailers who have a contract with Illinois internet affiliates were required to collect use tax under the click-through nexus law. In its 6-1 decision, the Illinois Supreme Court affirmed that federal Internet Tax Freedom Act, which prohibits discriminatory taxes on electronic commerce, expressly preempts Illinois click-through nexus law. The Court concluded that there is no active solicitation on the part of the internet affiliates. Although the click-through link makes it easier for the customer to reach the out-of-state retailers, the link is not different in kind from traditional advertising. The Court found that the Illinois law does not require out-of-state retailers to collect use tax if they enter into performance marketing contracts for offline advertising. However, since the law requires out-of-state retailers who enter into such contracts with in-state online affiliates to collect use tax, this law imposes discriminatory taxes within the meaning of the federal Act. It should be noted that the Empire State’s high court reached opposite decision earlier this year. The Court of Appeals of New York found that active, in-state solicitation is presumed when the resident is compensated for referrals that result in purchases. Under the New York Court’s view, such active, in-state solicitation that produces a significant amount of revenue qualifies as demonstrably more than a slightest presence. Amazon, through former Solicitor General Ted Olson, filed a petition to the United States Supreme Court on August. The Illinois case is Performance Marketing Association, Inc. v. Brian Hamer. And the New York case is Overstock.com, Inc. v. New York State Department of Taxation and Finance. Sources http://www.boe.ca.gov/sutax/abx1-28faq.htm http://news.yahoo.com/ill-high-court-invalidates-amazon-tax-sales-214307802--finance.html http://news.cnet.com/8301-1023_3-57608284-93/illinois-court-throws-out-amazon-tax-online-sales-law/