Monthly Archive: March 2014

2014 Taxation of Internet Sales

Submitted by Chris Moss CPA

Many of you have purchased products via the internet, either through Amazon.com or some other retailer. Sometimes you are charged sales tax and sometimes you are not. Have you wondered about the law that governs collection of tax on internet sales in the 21st century? The 2014 Tax Trend is toward eventual full taxation of all internet sales. Here is why:

All local and state governments want to collect tax revenue from sales of goods and services sold by retailers to you the consumer. But with regard to internet sales, there has never been a clear connection between the retailer and the consumer to allow the state governments to collect tax without violating various provisions of the United States Constitution. It has been for over fifty years well settled that the Constitution’s Due Process Clause as well as the Commerce Clause “requires some definite link, some minimum connection, between a state and the person, property or transaction it seeks to tax,” Miller Bros. Co. v. Maryland as cited in Quill Corp. v. North Dakota

To circumvent Constitutional restrictions, States have started to look more closely at the “use tax” laws that have been on the books for many years. A use tax is a tax on “use” of a product in the state for which no sales tax was paid. What that means to the consumer is that if you didn’t pay sales tax when you purchased the item, you are required to pay a use tax to your resident state if you are using the product you purchased. Unfortunately for the States, this tax is rarely collected because it is unenforceable as the laws are written. There is no way for a state to know if in fact you have used the product in the State unless you voluntarily communicate this to the State. How many of you have done that? Many states are even allowing for voluntary disclosure on income tax returns of how much you paid for products that you did not pay sales tax on and asking for payment via personal state income tax returns. But the State has no way of knowing the exact date you used the product in the state. The State only knows the date of purchase. If you did not use the product in the State then no tax can be collected. As an example, you purchase a product via internet in California and have it shipped to New York for use by someone else. Who collects tax on this purchase? Seems to me you could not be liable for a use tax since you didn’t use the product in California. But how would anyone know that except you?

States are now realizing that use tax is not going to work. Instead States have started aggressively taxing the internet based retailers with new legislation trying to create a connection to the State via the internet that will not run up against US Constitutional restrictions. From what I am seeing, the States are winning. The latest setback for the internet retailers came just two months ago when the US Supreme court refused to hear the case of Amazon vs New York State. Under the newest New York law that Amazon claimed was unconstitutional was a provision that required retailers without a physical presence in the state to collect tax if they use a local resident to solicit business online. Amazon sued New York claiming that they had no physical presence in the state. On the other hand, New York claimed in court that Amazon got business through New York-based affiliates who were “linked” only through the internet to Amazon. The New York Court of Appeals, the state’s highest court, concluded that affiliation agreements provided the minimum contacts and nexus to the State of New York to pass Constitutional muster. Amazon appealed through a “writ of certiorari” to the Supreme Court. The Supreme Court denied the writ on December 2, 2013 thus allowing the New York ruling to stand. For those of you who want to read the case here is the link to the various filings and petitions to the Supreme Court.
Here is the Supreme Court link
Here is the New York State Court of Appeals link

What does this all mean for us? There is no good news here for consumers. I believe that within the next few years a retailer with internet based business will be required to withhold sales tax on all internet purchases in most if not all fifty states. Taxes will be withheld and sales tax will be remitted to the appropriate state taxing authority. Moreover, it is only a matter of time, perhaps a few years later, that the Federal government will get a piece of this lucrative tax business. In my view Congress will enact a new National Sales Tax on internet commerce to be paid directly to the US Treasury through the IRS. How all this tax revenue will be collected and more importantly apportioned by the retailer to the appropriate state and possible future federal taxing authority will be subject of much litigation and confusion. However, eventually there will be a formula as legislated by Congress and approved as Constitutional by the Courts that will work its way into the taxation system allowing for fair collection of tax on all internet sales. The only good news here is that someday you can tell your children that years ago when mom and dad were younger there was no tax on internet sales.

Until next month, kindest regards from Chris Moss CPA