Many online retailers received a shock last month when they received official notice from the State of New York that they must register and begin collecting sales tax.
Until this month, companies that didn’t have a store or “physical presence” in New York were not required to collect the sales tax. This idea of taxation linked to physical presence has been around for a bit – and actually first made news with catalog sales. But the New York law presumes to redefine what constitutes a “vendor” on the web – and makes affiliates, marketers and shops that direct traffic to online retailers potentially responsible for creating a “physical presence” for purposes of tax.
As states like New York face pressure to find new revenue in a slow economy, taxing internet sales is an attractive option for legislators. To those legislators, increased revenue beats the option -cutting spending for programs. This is important because unlike the federal government, states may not operate at a deficit.
The argument for taxing internet sales focuses on the idea that many of the same products that could be bought in a store and be taxed escape taxation when purchased over the internet. If I buy a pair of shoes at my local shoe store, I do pay sales tax. If I buy a pair of shoes from Zappos, I don’t. Is that fair to local retailers? While it’s true that local retailers do not pay the sales tax, customers do, the lure of no sales tax to the customer may pull revenue away from local retailers. The result is lower tax revenue for the state.
Of course, most states do have a “use tax” that requires the end purchaser to pay the equivalent of sales tax on items that they buy without paying tax at the sale. Realistically, however, this doesn’t happen. Consumers are not paying use tax on items purchased over the internet. They just aren’t.
The alternative – this idea of paying sales tax in every state where you make a sale – is a complicated calculation for online retailers. Sales taxes vary from state to state, and also from city to city. In my own state of Pennsylvania, our sales tax is 6%. But I pay an additional 1% for the privilege of living in Philadelphia (yes, that’s how I choose to characterize it, since it makes me feel better). The rules governing sales tax are subject to the individual charters and rules within each state or municipality – and the rates are constantly changing.
If each state decides to follow New York’s lead, it could be costly for online retailers from an administrative perspective. This, I get.
Taxing online sales has been hyped before in California (for iTunes, no less) but didn’t get very far. The opposition to that tax raised many of the same issues as here. But maybe New York’s law will change that – after all, New York doesn’t have nearly the pressure of computer and tech giants breathing down its neck as California does.
So what does it mean? I personally don’t buy the argument that an increase in tax will cause consumers to go elsewhere… The tax is minimal and is no more than a consumer would pay by going to an actual store. Additionally, if the tax is imposed on all online and in person retailers, where else will the consumer go? The idea that this increase will cause some kind of mass exodus in online retail sales is, I think, bogus.
The issue, I think, is more appropriately whether it is fair this late in the game to change the rules.
Amazon.com and Overstock.com don’t think so. The online giants have already signaled that they will challenge the New York law.
You can read the official memo from the New York State Department of Taxation and Finance here.
I want to know: is sales tax a factor in your decision to make an online purchase? Would you stop buying online if you had to pay sales tax? Why or why not?
Good summary of the issue, Kelly. I’d heard about this in the news, but hadn’t put all the info together. I don’t think it’s so much the consumer who will object, but the business owner who will find it cumbersome and time consuming to collect sales tax for states other than their own. As you say, sales tax not only differs from state to state, but from county to county, municipality to municipality, town to town, and even within a town (depending whether you’re in the village proper or outskirts)!
We spent years making a living doing craft shows from VA to NH and west to OH, paying the sales taxes everywhere required. Everywhere folks paid what we asked, only occasionally asking for a price break. But in NY the most popular request was, by far, “can you not charge the sales tax”. Our standard response was “we don’t charge a sales tax, we only collect it for the folks you voted for”. Surprisingly, not a single person we had this discussion with had voted for the folks that instituted the NY sales tax or raised it to the current ridiculous levels of 8.5% in places.
I find it hilarious that you think people will not continue to purchase on line if they are chargeed sales tax. Reallly? Gas is the same as shipping now, and now i am also to pay tax? Why would i wait. While i will continue to find and shop online for things so i don’t have to pay tax, if more states adopt this, it will make it harder to do so. If you spend 100% of your take home, 6-8% of that is an additional tax , so yes, we do try to avoid it if all possible. Look at all the sales tax hlidays that occcur, and how much the retailers make on such days.
Hilarious.
JG – what a great come back! A lot of my clients are artists and are asked the same thing. I’m going to have to pass that along to them. 😉
Bill,
My informal poll of friends and colleagues leads me to believe that the majority of folks shop online for:
1, convenience and 2, selection.
Sales tax doesn’t change that.
While I am sensitive to cost, I also place a value on my time (I’m a busy working mom) and the cost to get into my car and go out to make a purchase. If Barnes & Noble or Zappos will bring it to my front door at a reasonable cost, I don’t take sales tax into consideration – especially since the purchase at my local Barnes & Noble or shoe store would, in fact, include sales tax.
Other than your comment, I have never met anyone who proactively orders on the internet solely to avoid sales tax.
Good article, but I think you missed a major point – how can NY require a company with no physical presence in NY to collect its tax? This will be interesting to watch play out. Personally, I’d like to see the states enforce their own use tax laws against their citizens instead of imposing burdens on out of state companies.
And no, I’ve always found that shipping costs offset the sales tax savings, so I don’t buy online in order to save sales tax. Plus all the major online retailers collect for my state anyway.
Another Tax Geek,
I guess that’s the issue – whether affiliates, shops that link in exchange for commissions and others with a presence in NY constitute physical presence.
Obviously, gone are the days when armies of salespeople went door to door. Are affiliates the equivalent of virtual door to door salespeople? NY wants to argue yes.
Of course it would affect online shopping — if you can get the same item for less, why wouldn’t you. But I agree, it won’t stop shopping. Since NY is the biggest tax hog out there (or maybe CA), we shouldn’t be surprised theyre trying. It would be interesting for you legal minds to analyze how NY can enforce this against a company with no presence in the state.
if they charging sales i’ll quit buying on the internet. the purpose is 2 save $$$$ in buying on the internet.
TexasEd,
What NY is trying to do is expand the definition of presence to include affiliates, etc. If the definition of “vendor” can be successfully broadened, then NY argues, there’s your presence. It will be interesting to see if that argument holds water in court, for sure!
“Are affiliates the equivalent of virtual door to door salespeople? NY wants to argue yes.”
I wouldn’t think so. Affiliates, as a rule, although residing in New York, don’t “target” New York customers. They, like the merchants, are looking to sell to anyone within the merchants shipping radius.
I think that since New York has specifically stated in the legislation that the presumption of nexus is only valid if in fact a merchant has had $10,000 in sales in the last four tax quarters FROM NY Resident affiliates TO NY customers, that it’s an undue burden placed on the merchant, since that would have to be tracked.
And merchants that use third party networks for their affiliate tracking (very common, with Amazon being a glaring exception) may not even have access to the addresses of their affiliates, if you can believe it. Networks are coming around on providing it though.
At the end of the day, some merchants decided to dump their NY affiliates altogether (offline as well, considering Overstock ended their relationship with Entertainment Book). And a lot of affiliates decided to incorporate elsewhere in order to keep their advertising relationships.
NY may lose as much in income tax as they gain in online sales tax 🙂
I live in NY, used to live in MA. I thought MA charged a lot of taxes, but it’s nothing compared to NY, and with this online sales tax collection, I will not make large online purchases (usually tech items) and ship to the state of NY anymore. There is no big purchase that I MUST have right now, they’re all luxuries. If I must, I will buy them online and have them shipped to MA and pick it up next time I visit my folks. Other large purchases like furniture, I never buy online anyways.
This is absurd. I live in NY and at a physical store, there is no tax on shoes or clothing under $100/each. Yet Zappos will charge me tax for shoes under $100. Other sites are smart enough to not charge tax.
Looking to do business NY (even as resident of the state) is awful. I am specifically starting an online tee-shirt business and if it weren’t for NY’s screwed up taxes my site would have been launched 4 months ago. Unbelievable…Paterson and NY make everything ridiculously hard. Its know wonder they are running this state into the ground. To use the word leaders in reference to these people – Republican or Democrat – is ludicrous.
Had hoped to sell a special limited interest dvd online but I’m bogged down trying to find out how to charge the correct sales tax for each zip code in the U.S., how to submit the tax collected to each state, how to set up PayPal or Google to charge correct sales taxes. Looks like it won’t be worth the effort.
Zwooon, yours is a different issue. If you don’t have a physical presence in other states, you would not be subject to collecting and remitting sales tax. In other words, if you live in PA and happen to sell a DVD to someone in SC, you don’t have to collect and remit the tax for the SC sale. If you sold to me, you would, since I live in PA.
These online retailers often have a presence in more than one state: shipping warehouses, manufacturing facilities, servers. That’s why you may sometimes see a note that says, “Sales Tax applicable in CA, MA, MS and HI” or something like that. The question hinges on presence, not sales.
yes I would stop online buying online if they charge sales tax ,that’s the whole point of buying online ,to save money
The reason I am here is because I was comparing prices between items at Zappos and Amazon.com. I noticed that the boots at Amazon cost me less because they did not charge me sales tax whereas Zappos did charge sales tax. I was looking to see why and ran across this article. So, while I would still probably purchase on-line, I can say I definitely will look around to find somewhere I will not have to pay sales tax if possible, because I have just done so. However I thought that Amazon had bought Zappos out so I am not sure why one charges tax and the other does not.