Thursday, May 22, 2008

Online Retailers are you THERE?

Welcome to the new online reality: Even if you aren't there, you ARE there. And in this case, "being there" means... you'll be charging and paying local sales taxes sooner than you'd thought.

The economy is hurting, and tax revenue is slumping. With this backdrop, the states have started to step up their efforts to collect sales taxes as brick and mortar or "click n' brick" retailers currently do. Currently, the set of decisions and laws that govern this area operate on the "nexus" principle. This basically means... if you have "nexus" in the state where the sale took place, you are to charge and pay sales tax. Online only retailers have been able to get around charging their customers sales tax in only a few states where they have physical operations (headquarters, warehouses, etc.).

But now comes a couple of significant challenges that look like they're going to have some possible impact.

First, in New York, Amazon is getting challenged by a new law that says their affiliate program has members that "have nexus" in the state of New York. The law says that Amazon needs to collect sales tax for all sales originating in and shipping to NY saying that because they pay out affiliate checks to New York-based affiliates... it is just like having a store in the state and paying an employee.

Next comes Texas. Shortly after the announcement and signing of the New York law, the state of Texas started to investigate Amazon, its affiliate program, and a distribution center that's operated as a "wholy owned subsidiary" of Amazon.

Finally, comes the City of Chicago... now suing eBay and STUBHUB over not collecting local ticket taxes. Stubhub has made the mistake of having an office in Chicago so they're pretty much going to have to pay. It is unclear whether or not eBay has an office within the city limits or not.

In all of the cases the nexus rules are being stretched and pulled. But, keep in mind that in an economy where people are spending less overall... tax revenue goes down. The states are hurting for revenue... they're trying to get back some of what has been lost by the growing online retail trend. While this has been rumored for a while... and different attemps have been made to start collecting sales tax... this is the first time some of the "larger states" like Texas and New York have been able to make headway. Also, don't forget... "it is all about the economy stupid."

What does this mean? Well for the large guys like the Amazon's, the Stubhubs and the eBays... it is an inconvenience but... not a show stopper. For the smaller online only retailers... they might want to look at how they're going to be collecting taxes sooner rather than later. I'd had hate to be a small retailer that has to write a "back taxes check." In the past, states have proposed amnisty for those who have voluntarily collected sales tax (Dell Computer is one). For affiliates... if an affliate is the ONLY reason that an online retailer is proved to have nexus in a state... I wonder who will be the first to add in the development and administrative costs for tax collection... in the overall ROI proposition for their affiliate program.

Interesting times for sure.

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