By: Fred Longwood, CPA
With the expansion of internet sales over the past decade, the conventional wisdom has been that consumers could save money on the purchase of products online rather than purchasing those same products in retail stores where the transactions would be subject to sales tax (caveat: use tax is always required to be paid by businesses and individuals alike where no sales tax was paid). Recent developments in this area suggest that the days of sales-tax free shopping on the internet may be coming to an end. In February 2012, Virginia governor Bob McDonnell announced an agreement that would bind online retail giant Amazon.com to collect and remit sales tax to Virginia beginning in September 2013.
The general rule is if an online retailer has a physical presence in a particular state, such as a store, business office, or warehouse, it must collect sales tax from customers in that state. If a business does not have a physical presence in a state, it is not required to collect sales tax for sales into that state. This rule is derived from the 1992 Supreme Court decision Quill v. North Dakota, which held that mail-order merchants did not need to collect sales taxes for sales into states where they did not have a physical presence. The agreement reached between Virginia and Amazon.com is based on the expansion of Amazon.com's physical presence in Virginia, which now includes a data center and a distribution center. Currently, Amazon.com collects and remits sales tax for 5 states: Kansas, Kentucky, New York, North Dakota, and Washington.
In a separate development, the District of Columbia, as a part of its 2012 Budget Support Act (D.C. Bill 19-203, the ”Act"), now requires remote vendors that sell goods via the internet to collect sales tax from D.C purchasers. The Act changes the definition of a retail sale to include any sale effected via the internet by a so-called "nexus-vendor." A "nexus-vendor" is defined as a vendor that has a physical presence within D.C. or sells property or renders services via the internet to D.C. purchasers. Under the Act, where the tangible personal property sold is not physically in D.C. at the time of the execution, the sale is taxable if made by a "nexus-vendor" because the execution of the contract of sale takes place in D.C. This concept of economic nexus, which transcends physical nexus, is a concept being pursued by states in an effort to expand their sales taxable base.
For many states, sales tax revenue accounts for the single highest revenue source for funding state budgets. With this in mind, and state budgets nearing the breaking point, many states are pressuring Congress to exercise its authority to change the current policy established by Quill v. North Dakota and enact legislation requiring all retailers to collect sales taxes. "Congress," the Court declared, "is … free to decide whether, when, and to what extent the States may burden interstate mail-order concerns with a duty to collect use taxes."
It will be worth watching how the ever-expanding and changing concept of nexus will develop over the course of the next few years and how this will affect both your organization's cost of ordering tangible personal property as well as your responsibility for collecting and remitting sales tax to various states as determined by that state's definition of nexus.
Fred Longwood is a manager in Tate & Tryon’s Exempt Organization Tax department and can be reached at flongwood@tatetryon.com.
