John Martin
Associate Editor
Loyola University Chicago School of Law J.D. 2018
Imagine you are an e-commerce entrepreneur and you log in to your reporting system to see how sales have been over the past week. You notice that you’ve made a good sale to a customer in the state of Illinois. As you are based out of Florida, you pause for a moment to marvel at the progress of technology and how your products can be delivered to someone’s home thousands of miles away from you. Little do you realize, but you may be on the hook for collecting and reporting sales tax to the California Board of Equalization.
Only five states—Alaska, Delaware, Montana, New Hampshire, and Oregon—do not have a sales tax. Of states with a sales tax, Wyoming has the lowest at 5.47 percent, while Washington has the highest at 8.89 percent. In 1992, the Supreme Court ruled in Quill Corp v. North Dakota that sales tax can be charged when a retailer has a physical presence in the state where the sale takes place. As this decision dealt with the mail order business and not e-commerce, the definition of “physical presence” has expanded over the years by states attempting to capture more tax revenue. The National Conference of State Legislatures estimated that states lost 23.3 billion in tax revenue in 2012, so naturally, state legislatures in need of additional funds turn to these sales as another source of revenue. Additionally, some states have instead made certain purchases taxable, regardless of whether the physical presence has been established by the seller of the product.
Amazon Laws
These laws, whether enacted or proposed, are commonly called “Amazon Laws” due to the prevalence and name recognition of the e-commerce retail giant. Early this year, Amazon, which collects sales tax on behalf of the e-commerce stores that sell through the site, added ten states to its list of states it collects in, bringing the total to thirty-nine. The savvy e-commerce entrepreneur has to keep these laws in mind, as each sale they make may be creating a taxable event. Proper collecting and reporting of data allows the entrepreneur to stay compliant with the law. So how is a smaller-scale e-commerce retailer wishing to stay compliant to do this? The answer is both simple and complicated.
State tax laws are listed on their respective states’ websites, and maneuvering around those wbeistes can e tricky. Luckily, there are websites where the data and the location for the data has been collected into one, easy to use repository, such as Nolo.com’s database. This is a great starting point, but it is only a starting point. While the data there will be informative, due diligence is always needed. In order to fully understand what is going on with each state, one must continue to research, looking through the respective state’s department.
Origin-based versus Destination-based
For physical presence collection purposes, most states are broken down according to two methodologies: origin-based and destination-based. Under the origin-based system, the tax is determined based off of the rate where your office or warehouse is located. Destination-based makes the rate determination based off of the rate where your product is being shipped to, the purchaser’s location. To demonstrate, assume the previous scenario of a retailer based in Florida selling to someone in Illinois. Under Illinois law, there is no need to collect sales tax. However, if the seller was located in Illinois you would be on the hook for collecting and reporting the sales tax. The physical presence rule can be tricky to deal with in determining whether or not an e-commerce retailer has established a physical presence within a state. It is important to note that some states have clauses in their Amazon laws that allow a seller to make the argument that they do not have enough contacts within the state to properly justify the collection of sales tax.
As to the sale of certain products, this too requires a look through a state’s particular laws to make the determination. Ultimately, if you are an e-commerce store that uses a mainstream service, there are often either controls within the system or third-party plugins that will enable you to streamline this system and ensure compliance. The last thing an e-commerce retailer would want is for a state to come down on them regarding non-compliance.