Nearly every state charges a state sales tax, and you’ll see this charge on most purchases. However, because there is no national law for sales tax, the amount you’ll pay and the items subject to tax vary.
West Virginia became the first state to pass sales tax legislation in 1921. Today, 45 states, and many local jurisdictions, have some type of sales and use tax. However, there has been a recent political push to switch to a value-added tax, which exists in Europe, or a national sales tax based on federal income taxes and a system of rebates.
“On average, sales taxes generate $150 billion a year and account for nearly one-third of a state’s total revenue,” says Timothy A. Dudek, director, Tax Strategies, at Kreischer Miller. “With the potential to increase this amount by taxing online sales, state governments are not likely to give up on the idea of a national sales tax. And enough state pressure may be able to force the federal government to pass such legislation.”
However, a new theory called “affiliate nexus” is emerging, which may override the older concept of “physical presence nexus.”
Smart Business spoke with Dudek about the latest trends in sales tax imposition and collection.
Recently, states have expanded the sales tax to apply to affiliate nexus. What is affiliate nexus?
Many out-of-state retailers enlist independent in-state websites known as affiliates to promote sales. An affiliate places links on its website to a retailer’s site and receives a commission when someone follows the link and buys goods. This affiliate nexus will now require out-of-state vendors to collect and remit sales tax, even though the vendor does not have a physical presence in the state where the purchaser is located.
New York was the first state to adopt sales tax affiliate nexus legislation, known as the Amazon law. Under the legislation, a remote seller is presumed to be a vendor required to collect New York sales tax if:
■ The seller enters into an agreement with a New York state resident, under which a commission or other compensation is paid, if the resident directly or indirectly refers potential customers to the remote seller, whether by link, an internet website, or otherwise, and
■ The cumulative gross receipts from sales by the remote seller to customers in New York as a result of referrals total more than $10,000 during the preceding four quarterly sales tax periods.
North Carolina and Rhode Island have adopted similar legislation. In California and Hawaii, New York-type statutes have been vetoed by the governors.
In response to the Amazon law, more than 30 electronic retailers registered as sales tax vendors in New York. New York estimates that it will receive approximately $70 million in revenue for fiscal year 2009-10 from these vendors. According to some sources, as many as 60 sellers have ended their affiliate programs in New York to avoid the burden of collecting New York sales tax from customers.
