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Online Retailers Brace for Sales Tax Collection

Posted by Paul Christ August 16, 2010

Tax Attack! (Internet Retailer)

Since the emergence of online retailing in the mid-1990s, retailers running store-based outlets have complained that online retailers have an advantage because they are often not required to collect sales tax.  This exemption from collecting sales tax has to do with a 1992 U.S. Supreme Court ruling that said retailers without a physical presence in a state that has a sales tax are not required to collect sales tax when selling to someone in that state.  While the Court was evaluating this issue in terms of direct mail companies, the Court’s decision has also been applied to online retailers.

The question of whether online retailers must collect sales tax is once again being raised and this time the result may be different.  As discussed in this story, the sour economy is driving many states to seek new revenue sources, and they see sales tax from online retailing as an obvious target.  In particular, many states are looking to go after online retailers that have established affiliate relationships.  Under such relationships, third-party websites direct traffic to an online retailer in exchange for a percentage of the sale.  The state in which these referral websites are located is what is getting the sales tax proponents' attention.  They argue that online retailers, whose sales originate from affiliate websites with a physical location in a state, are liable for collecting sales tax even if the online retailer is not located in that state.

The implications for online sellers of this more aggressive move to collect sales tax may be significant.  The most obvious problem they face is a potential increase in the amount final customers pay for purchasing products (assuming sales tax is added to the final price).  Higher pricing could put online retailers at a disadvantage with store-based retailers.  The theory is customers are less likely to wait for product shipment if they can obtain a product at the same or even a slightly higher price from a local store.  They also face higher costs in maintaining an accounting system that tracks all sales and the associated taxes.

Legislation before Congress would authorize dozens of states to require online retailers to collect sales tax. Such legislation has been proposed before, but the sorry state of state government finances raises the chances of passage.  Such a law would end the luxury web-only retailers have enjoyed of not charging sales tax on most orders.

If the move to broaden the collection of sales tax gains momentum, what will be the effect on affiliate marketing relationships?

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