Internet retail has been a successful business model for many. There is real confusion, however, surrounding the collection of state taxes. If it’s found that a company should be collecting state taxes and are not, they could be shifting the tax burden from their customers to themselves. Failure to collect state taxes can lead to fines and penalties on top of the unpaid taxes. Many times, a business that is found to owe state taxes has to pay the bill themselves, as it can be costly to make customers pay for sales taxes of past transactions.
In March, the US Senate reintroduced the Marketplace Fairness Act. It originated and passed in 2013, but was not taken up in the House due to Representatives seeing it as raising taxes. The act gives the States the authority to collect taxes already levied by state law from out-of-state businesses.
In the same month, the Supreme Court heard the Direct Marketing Association v. Brohl case, which challenges the rights of the State of Colorado to require out-of-state sellers provide sales and usage reports. The state had passed a law requiring out-of-state sellers to report to the State of Colorado which citizens made purchases (online or otherwise), where they live, and how much was spent. The Supreme Court overturned the ruling of the Tenth Circuit- which originally stated that they did not have jurisdiction over the case according to the Tax Injunction Act of 1937; this bars the Federal Government from prohibiting the States from collecting taxes. It is important to note, the Supreme Court did not say whether or not the State of Colorado has the right to create and enforce that law. The case has now gone back to the Court of Appeals.
Currently, the obligation to collect sales taxes rests on determining if a business has nexus in the state were the purchaser is from. Nexus is the physical presence (temporary or permanent) a business has within a jurisdiction. If a business has property or people working within a jurisdiction, nexus exists. Where nexus exists, taxes are to be collected by the business on behalf of the state.
If you are a US seller, make sure you pay attention to current sales tax legislation activity. The intent of it all is to level the playing field between brick & mortar and online sellers. Whatever your opinion may be, the best course of action is to remain informed of what is happening and how it may affect your business practices.
Internet Retailer: The Supreme Court giver e-retailers a win on sales taxes, but it may be short-lived