Shopping for the holidays and taxes

Now that the Holiday Season of 2014 is upon us, you probably started shopping for those luxurious gifts for that special friend or relative. Attempting to find good deals on-line, and also one may think that by shopping on-line, there would be no sales taxes. Well, here is a surprise; on-line sales may still be subject to sales taxes.

Here is when any of 50 states (and the 6 territories) of the United States could impose a sales tax on any retailer; be it online or a “brick & mortar” store:
1. The retailer must have “substantial nexus” in a given state;
2. The tax must be “fairly apportioned”;
3. The tax must not discriminate against interstate commerce;
4. The tax bears a fair relationship to services provided by the state.

Items 2 through 4 are easy enough for any of the states to argue on its sales taxes, however the biggest argument by on-line retailers (as well as their customers), is Item 1, the “substantial nexus” test.

Just being an online retailer, would not be sufficient to trigger “substantial nexus” in a given state, but having an office, or having sales representatives in a given state may trigger “substantial nexus”. This is exactly what has happened to the major on-line retailer, Amazon.com, because it started to have local (albeit independent) “affiliates” associated with Amazon.com. What these “affiliates” do is they operate their own on-line retail stores independent, but sales would come through Amazon’s website. Thusly, various states (especially New York and California) started to stretch its “long-arm of the law”, by amending their sales tax laws, to include these “affiliates” as part of placing the main online retailer as part of “substantial nexus”. Hence, in Amazon.com’s case any sales to 23 states (including California, New York, Texas, and Florida), would be subject to sales tax. Furthermore, most states that have sales taxes, have also imposes a “use tax”, which is if a customer purchases an item from an online retailer that does not have “substantial nexus” in his/her state, then they would still have to pay the same rate of sales tax of the state, as a “use tax” because the consumer will use that purchased item.

So if you are planning to purchase that special holiday gift online, do not think that you will avoid the sales tax (or even the use tax) of your state, because the states are stretching their “long-arm of the law” on online retailers. So that they would be at least (as the states would argue) on equal par being subject to sales taxes, with the traditional “brick & mortar” retail stores. Also, if you are planning to be an online retailer, please contact us at info@kayatax.com and will be more than happy to help you in explaining how your sales would be subject to sales taxes, and how to setup yourself with your state in establishing a sales tax account.