Imagine you are at home, in Kansas, on Black Friday searching the Internet for Christmas gifts. Low and behold, you find a great deal on Widget.com, a California company, for the latest Widget your child has been talking about for weeks. Naturally, you buy it on the website and have it shipped to you. Query? Where did the sale take place? Does Kansas or California get the sales tax? Or since websites don’t have a physical location should this sale be taxed at all?
This unique problem to online sales is one of the juicier tax issues occupying legislators across the country this year. So juicy in fact that the Supreme Court declined to hear a New York Court of Appeals case concerning Amazon.com. The New York Court found that even though Amazon did not have any physical presence in New York, the commissions Amazon paid to third-party affiliates created a “substantial nexus” needed to force Amazon to collect sales tax for New York. The Supreme Court ducked Amazon’s case because it felt Congress is in a better position to provide uniformity in state tax collections. The Court’s inaction leaves us with only the “substantial nexus” test as a guide. So if Seller is located in Kansas and makes an Internet sale to Buyer in Missouri and Seller also happens to have contracts on other matters in Missouri, do both states have the required nexus and are both entitled to collect sales tax? The substantial nexus test was created by the Supreme Court in Quill v. North Dakota to decide when out-of-state businesses should collect sales tax. The problem with Quill is that it was decided before Internet sales really became an issue and it does not address the situation where the Seller does not have a “physical presence” in states where customers make purchases. To help combat this problem, last spring the Senate passed the Marketplace Fairness Act of 2013, which requires companies with over $1 million in online sales to collect sales tax in each state where a purchaser is located. However, this bill has not passed the House and there are serious concerns about it amongst lawmakers.
