Everywhere you turn, it seems, there's yet another state looking to pass legislation that would require online retailers to collect sales tax. Most recently, California's governor signed a bill that will require out-of-state retailers to collect sales tax if they sell to California residents and make more than $50,000 a year in sales.
Under federal law, states cannot collect sales tax from out-of-state retailers unless they have a physical presence in that state. This is called having nexus, or a connection to the state. But increasingly, states are trying to get around that loophole by broadening the definition of "physical presence."
New York was the first to pass such a law in 2008. Rhode Island, Illinois and North Carolina soon followed. At this writing, 12 other states are looking to pass similar legislation. And Sen. Richard Durbin of Illinois is planning this fall to introduce a bill into Congress that would require online sellers to collect state sales taxes, no matter where they are located.
With states becoming more aggressive about collecting online sales tax, and looming legislation at the national level, we wondered how these proposed tax laws will affect online sellers like you. We talked to a few experts to get their opinions and find out what you need to know.
What are these bills?
Online sales tax bills have become collectively known as the "Amazon Tax" because they would make it OK to collect sales tax from big retailers like Amazon in states where they sell products and have a physical presence, notes Cliff Ennico, a business attorney and the author of "The eBay Seller's Tax and Legal Answers Book."
States have long followed the Supreme Court decision in Quill v. North Dakota, which found that catalog sellers should only pay sales tax if they have a physical presence in a state where they sell their items. Though the Internet was just beginning in those days, this decision was also applied to online retailers.
The Amazon Tax bills are an attempt by states to get past the precedent. Though the proposed laws target larger retailers like Amazon or Overstock.com, they would require any out-of-state retailer or affiliate making more than a certain sales minimum to collect and pay sales tax if they sell to customers in a state where they have a presence. This presence could be a warehouse, an office, a drop shipper, or even a blogger who drives traffic to a site. So, despite the nickname, these laws affect anyone doing business online.
"State and local governments are desperate for revenue," Ennico explains. "Historically states have relied on property and sales tax for revenue. What's happened to property taxes? They've gone down, so governments are going after sales tax."
State officials also say the federal nexus law gives online retailers an unfair advantage over brick-and-mortar stores, and that these bills aim to level the playing field. Proponents argue that while online retailers are supposed to collect sales tax if they have a physical presence in the customer's state of residence, they often don't. And individuals who make the purchases rarely report these and pay the required sales tax to the state.
This means not only that online merchants can offer products for much less than brick-and-mortar shops, which have to charge a sale tax, but also that millions of dollars in sales tax go uncollected because tax collection isn't being enforced.
Sales tax revenue between 2007 and 2010, according to the Associated Press.
eBay sellers have always been required to collect and pay sales tax if they have a physical presence in the state where a package is delivered
Will these laws affect you?
These online sales tax laws will likely not affect eBay sellers—at least not right now—but that doesn't mean eBay sellers are off the hook, Ennico says. If the laws pass, it would be up to individual sellers to collect sales tax. Unlike Amazon, eBay would not have to pay on behalf of its sellers. That's because eBay essentially functions as a mall, providing a space where merchants can offer their items. It does not involve itself much in the actual sales process.
"When you buy something on eBay, you're buying from me," Ennico explains. "eBay does not get involved more than to collect a fee. Amazon is much more involved." For instance, Amazon fills and ships orders through its fulfillment service.
Still, eBay sellers have always been required to collect and pay sales tax if they have a physical presence in the state where a package is delivered. Again, this physical presence could be a brick-and-mortar store, an office—or it could be a storage warehouse or drop shipper. So it benefits sellers who use fulfillment services or drop shippers to know where these services have warehouses or offices.
Now, it is true that many of these proposed online tax laws have a minimum sales requirement. This just means states that pass these laws can't actively go after the out of-state-retailers that fall below that threshold if they fail to pay sales taxes. It doesn't excuse in-state sellers who fall below the threshold from paying sales tax.
"You are always responsible for collecting sales tax when you sell something online to a resident of the same state, or another state where you have a physical presence," Ennico adds.
As eBay moves toward an Amazon model and gets more involved in the selling process, it could be liable for uncollected taxes, too, Ennico notes. He points to the fulfillment service eBay will introduce this year, which might make it more involved in the sales process.
Sellers voice concerns
Skip McGrath, who is a Top-rated seller on eBay, an Amazon merchant and publisher of The Online Seller's Resource, says the proposed Amazon Tax laws are of big concern to online merchants—particularly for Fulfillment by Amazon sellers, like himself.
"Since we send out goods to [Amazon's fulfillment center in] Arizona, that gives us a nexus in Arizona, so we have to collect and pay taxes when something ships out of Arizona to any Arizona address," he explains. "Some Amazon sellers ship to warehouses in multiple states, so that compounds the problem."
Why is that? Because there are so many tax jurisdictions in the country, which can make collecting sales tax both confusing and time consuming. This worries online sellers. In a recent AuctionBytes poll, 53 percent of merchants said they would stop selling online if they had to collect sales tax for every jurisdiction.
Software is available to help sellers calculate tax rates and exceptions, like Avalara, and as more technology becomes available to sellers, Ennico only sees states becoming more aggressive toward online sales tax collection.
eBay keeps a watchful eye
Amazon is staunchly fighting these proposed online sales tax bills, often cutting ties with some of the states proposing them. eBay is also keeping an eye on these bills, and has been outspoken against them, says Brian Bieron, eBay's director of Federal Government Relations and Global Public Policy. Despite their being targeted at Amazon-type retail sites, eBay fears small businesses like eBay sellers will get caught in the crossfire.
Many of the proposed online sales tax laws have minimum sales requirements, but these minimum requirements can be as low as $10,000. In California, the proposed sales minimum for out-of-state businesses to collect sales tax is $50,000. eBay notes that many of its sellers surpass these thresholds, and says it will push for a higher threshold in California.
When you reach a certain size, get an accountant or a lawyer and tell them to show you where you have nexus
"We believe it would be bad economic policy, and fundamentally unfair to impose the same national-scale tax burdens on small retailers that are applied to giant retailers," Bieron notes. "Small business retailers offer consumers a different value proposition than giant retailers, and should not face the same tax obligations."
eBay has always called for tax-legislation to include "robust" exemptions for small businesses, Bieron adds.
"We believe that government should not step in and raise taxes for small business retailers when many other major costs of doing business are higher for small businesses," he says.
So what should eBay sellers do, in light of all of this? If they don't already, they should start collecting sales tax when they send an order to a state where have a physical presence, Ennico says. They should also keep good records and seek the advice of a lawyer or accountant. Merchants shouldn't try to figure out tax laws on their own, as tax law can be very confusing, he advises.
"You don't have time to figure out your taxes and work on all the other aspects of your business," he continues. "When you reach a certain size, get an accountant or a lawyer and tell them to show you where you have nexus. Let them spoon feed you the knowledge."
If you're worried that hiring a professional will be too expensive, Ennico says you shouldn't be. Many professionals will chat on the phone for free for 15 minutes or so, and you can always negotiate hourly rates—just don't go too low. And if a lawyer or accountant isn't willing to negotiate, move on. "Someone else will negotiate," he says.
eBay sellers can also adjust their account settings to automatically collect sales tax on purchases. To do this, go to My eBay, hover your mouse over the Account tab, and click "Site Preferences."
From here, find the "Payment from buyers" section and click the "Show" link. Create a tax table by clicking the "Edit" link to the right of "Use sales tax table." Then enter the appropriate tax rate for the states in which you have a physical presence, and click the Save button at the bottom. This will not only allow you to automatically charge a sales tax on the item, it will also show the buyer how much they will need in taxes to purchase the products.
"The party's over," Ennico says. "It's time to start paying the taxes."