By Cliff Ennico

Thanks to a new law in California, the days of selling online without having to pay sales tax are numbered. Since 2008, a number of states have attempted to impose their sales taxes on Internet commerce, most of which involves sales across state (and often national) boundaries.   States try to tax e-commerce in a number of ways, but the approach that’s gotten the most publicity is the so-called “Amazon tax” adopted by New York, Rhode Island, Illinois, North Carolina and a couple of other states.  In these states, Amazon.com, Overstock.com and other e-commerce platforms that allow small businesses to sell on their sites as “affiliates” are required to collect and remit state and local sales taxes if an affiliate sells more than a certain dollar amount to residents of that state each year (the annual threshold is normally $10,000 to $20,000, although it’s only $5,000 in Rhode Island). The theory is that affiliates of e-commerce platforms are “agents” of the platform, and therefore are subject to state “nexus” laws taxing out-of-state companies that operate through in-state employees or other “agents”.  Pretty creative, no? The reaction to these laws has been straightforward – Amazon, Overstock and other affected retailers (eBay sellers are not considered “affiliates” of eBay so the tax isn’t a concern for them) have simply terminated their affiliates in Amazon-tax states rather than comply. Earlier this year, California attempted to join the fray (imposing a $500,000 threshold on sales by California-based Amazon affiliates), but Amazon fought back, spending more than $5 million to launch a public referendum to stop California’s “Amazon tax” law and ban collection of sales tax on online sales in California.  Rather than face a law banning taxes on Internet sales, California negotiated a settlement with Amazon which was signed into law last week. Under the terms of the settlement:

• Amazon will drop its referendum challenge;
• California will defer enforcing its “Amazon tax” until September 15, 2012, and even then will enforce it only for Amazon affiliates who sell more than $1 million to California residents;
• Amazon has pledged to create at least 10,000 full-time jobs and hire 25,000 seasonal employees in California by the end of 2015;
• Amazon will reinstate its California affiliates, estimated to number between 10,000 and 20,000; and
• California will forego any sales tax owed by Amazon affiliates for the period since the original “Amazon tax” law was passed.

So far, pretty uncontroversial.

But here’s the kicker:  as part of the settlement, Amazon and other online merchants are supposed to lobby Congress to find a national solution to the out-of-state Internet sales tax collection issue.  If Congress fails to act on nationwide legislation by September 15, 2012, California’s “Amazon tax” will kick back in, and Amazon presumably will not be able to fight it at that time, having agreed to the settlement.

State and local governments are prohibited from imposing sales and other state and local taxes on interstate commerce under the “commerce clause” of the U.S. Constitution, as interpreted by a 1992 United States Supreme Court ruling (pre-dating the Internet, you will note).  An act of Congress can overrule that Supreme Court ruling, and in each of the past few Congresses somebody has introduced a bill to do just that.  The bills have generally gone nowhere, due to intensive lobbying by Amazon and other e-commerce platforms.

But now that Amazon has agreed to join brick-and-mortar retailers and lobby for Internet sales tax legislation, there’s a much better chance such a bill will pass and sales taxes not only on Internet commerce, but on all interstate sales transactions, will become the law of the land.

Such a bill was introduced in July of this year – the “Main Street Fairness Act.”  This bill would overrule the 1992 Supreme Court ruling and enable the 21 states that have voluntarily adopted the Streamlined Sales and Use Tax Agreement (www.streamlinedsalestax.org) – a grassroots effort to simply and standardize sales tax regulations in an effort to encourage taxation on interstate sales — to implement and enforce the Agreement on sales between member states.

Online sellers need to keep their eye on developments, but I wouldn’t panic right now.

First, the September 15, 2012 deadline is sure to be extended, as it comes right before the 2012 Presidential election and Congress will be distracted by politics.

Second, even if Congress passes the Main Street Fairness Act before then, only the states that have adopted the Streamlined Sales and Use Tax Agreement will be immediately affected.  Other states will have to pass legislation either adopting the Agreement or otherwise meeting the Main Street Fairness Act’s mandates.  That will take time.

Having said that, if you are selling online and haven’t been collecting sales tax on your “in-state” sales, or your sales to other states in which your business has a physical presence or “nexus” (such as an office or warehouse), you need to start doing so now.  Ignorance of the law is no excuse.

Cliff Ennico (www.succeedinginyourbusiness.com), a leading expert on small business law and taxes, is the author of “Small Business Survival Guide,” “The eBay Seller’s Tax and Legal Answer Book” and 15 other books.