Trying to tax online sales

Following that logic, Cyber Monday, the Monday following Thanksgiving, when Internet retailers traditionally offer buyers their best deals, could soon be referred to as Golden Monday.

According to the data-tracking firm comScore, Americans spent a record $1.25 billion this Cyber Monday, and spent approximately $15 billion on online purchases during November alone.

A federal tax proposal could soon enable cash-strapped states to join fully in this online buying extravaganza.

In 1992, the U.S. Supreme Court in Quill Corp v. North Dakota held that a state could not tax the sales generated by a retailer that lacked a physical presence, a tax nexus, in the state.

As a result, online retailers that do not maintain physical storefronts in any state have been able to legally avoid the imposition of the sales tax that other merchants must collect from buyers.

Critics claim that Quill Corp. created a loophole that amounts to a tax subsidy for online-only retailers and places traditional brick-and-mortar merchants at a competitive disadvantage. The National Conference of State Legislatures, a non-profit advocacy group that represents state legislatures and their staff, projects that states will lose about $23.3 billion in sales tax revenue in 2012 as a result of the Quill Corp. ruling.

States have tried to work around Quill Corp. for a number of years with little success. Most states, including Texas, require buyers to pay the tax due on a sale if the seller does not collect the sales tax. Such "use tax" is seldom enforced by taxing authorities.

Forty-four states have signed on to the Streamlined Sales Tax Agreement, the SSTA, a multi-state arrangement whereby member states agree to streamline their sales tax laws and collections for their collective benefit.

To date, however, only 24 states have actually enacted laws that implement the agreement. Neither Texas nor New Mexico is a signatory to the SSTA, and it does not apply to Internet sales by online-only merchants.

Most recently, states such as Texas and California enacted laws that use the warehouses and order-fulfillment centers owned, operated or controlled by online-only retailers within their states as a basis to establish the taxable nexus required to tax online sales generated by such e-merchants. A couple of New Mexico legislators recently said that they plan to introduce similar legislation during the next New Mexico legislative session.

On Capitol Hill

Congress has also decided to get involved. Both the Marketplace Equity Act, HR 3179, introduced Oct. 13 by Rep. Steve Womack, R-Arkansas, and the Marketplace Fairness Act, S 1832, introduced Nov. 9 by Sen. Mike Enzi, R-Wyoming, are intended to facilitate states' assessment and collection of taxes from Internet-based merchants.

Both acts provide states with the authority and mechanisms to collect sales taxes from online sales, or remote sales, generated from merchants that lack a physical presence in the taxing state, or remote sellers.

Neither bill requires a state to take advantage of the taxing authority granted therein. Moreover, neither bill automatically implements a sales tax on Internet sales. To take advantage of the authority to tax Internet sales, each state must still enact its own legislation that streamlines the assessment, reporting, collection and remittance of sales taxes on Internet sales. They also exempt "small sellers" from the reach of the Internet sales tax.

Each bill differs on the definition of a small seller. The House bill defines a small seller as a remote seller that in the preceding calendar year had either $1 million or less in combined remote sales in the U.S., or $100,000 or less in remote sales in the particular state.

The Senate bill defines a small seller as a remote seller that had $500,000 or less in combined remote sales in the U.S.

Neither bill would extend a state's jurisdiction for any other purpose except for sales tax purposes. Thus, a state would not be able to use either bill to claim that an Internet-based seller acquired nexus within the state for franchise, income or any other tax purpose.

Further, both bills prohibit states from assessing a sales tax on goods or at rates that differ from resident merchants. Such discriminatory taxes are also prohibited under the Internet Tax Freedom Act, which sunsets in 2014.

Amazon, the largest online-only retailer, waged a pitched but lost battle in several states during the summer to block the enactment, or delay the implementation, of state laws extending tax nexus.

However, Amazon is backing the Senate bill because, in a sly move of business judo, it plans to offer online merchants a clearinghouse to process their state sales-tax compliance requirements if either bill passes. Other retailers, such as eBay, are against the current federal proposals.

Critics of the measures argue that the exemption for "small sellers" is, well, too small. Neither bill addresses the vast and intricate differences amongst states on what goods or services are taxable or exempt - which would place a significant compliance cost on small retailers. In the end, critics argue, either federal proposal would serve as an impediment to small businesses seeking to expand their markets via the Internet - a problem Amazon plans to address for a small monthly fee!

Franchise tax update

As I predicted in my Nov. 6 column, the Texas Supreme Court on Nov. 28 upheld the constitutionality of the Texas franchise tax, also called the margin tax, in Allcat Claims Service L.P. v. Combs on Nov. 28. The court held that Texas law treats partnerships as entities, not as aggregates of their partners, and that the liability for the margin tax fell on the partnership as an entity.

Partners, the court explained, do not have an ownership claim to the partnership's income until the partnership distributes such income to its partners. Thus, the margin tax is not an indirect tax on the income of the partnership's individual partners. The court, on jurisdictioonal grounds, declined to address certain other issues raised in the case.

Contact Oscar Javier Ornelas, a tax attorney with Scott Hulse law firm, at (915) 525-5290, e-mail oorn@scotthulse.com, or follow his blog at www.ojotax.com.

The opinions expressed are solely those of the author. The reader should consult an attorney whenever confronted with a serious legal issue.