State & Local Tax Blog

The Empires Strike Back — Plus Big Changes in California and Colorado

The Empires Strike Back — Big Developments in Colorado and California

Amazon.com has long been a target of the state government empire. In fact, the Empire State started it all. We’ve mentioned before that New York has been on the forefront of the nexus wars. They were the first to float the idea that Amazon, by virtue of their “affiliate” relationships in NY has nexus in NY.

Never mind that the term affiliate as it relates to Internet relationships is not nearly the relationship contemplated in the more traditional usage of that term. The dictionary.com definition of the term “affiliate” as used in commerce is “a business concern owned or controlled in whole or in part by another concern”. In common Internet usage, to be an “affiliate” of a website is no such thing. I can be “affiliated” with Amazon.com by merely signing up to be one. I agree not to do certain things that would harm Amazon, but I certainly am not owned nor controlled by them nor do I represent them, and certainly I do not have any authority to bind them to an agreement with another party. Just because I’m called an affiliate, doesn’t, in and of itself, mean that now Amazon.com has nexus wherever I live. But that’s what New York is saying. And how all this turns out is something we have been observing with some interest.

Taxation Without Representation

When one state seems to be having some success in either targeting certain types of taxpayers or certain industries or employing certain techniques or novel approaches to taxation, other states jump on the bandwagon. We see this happening in this case also. In fact, in the publications we subscribe to, it’s not at all uncommon to actually see headlines like “X State Legislature Passes ‘So-Called Amazon Provision’ Into Law”. This trend of states getting ever more aggressive is on the upswing.

Virginia is the just the latest example of this. A bill just passed the VA Senate that provides a presumption of nexus exists in a situation where a seller enters into an agreement with a VA resident in which the resident “refers potential customers” to the seller “by a link on an Internet site”.

What states really like is taxation without representation. It’s almost impossible, and probably political suicide, in the current environment to suggest raising taxes. But revenue shortfalls and corresponding budget deficits abound. To cut spending might seem to be the logical choice, but that’s also politically difficult. Who wants to be accused of trying to “balance the budget on the backs of the poor”? So what is there to do? Certainly, a state can send out more auditors and train them to be more aggressive. That is definitely happening, but even that comes at a cost. If you harass your own taxpayers too much, they begin to want to vote in some different people.

What if you could tax people who can’t vote you out? This is exactly what is at the root of all this. Get money from companies who can’t vote you out of office. They’re not citizens with a vote. Plus the states can pursue them with a certain righteous indignation. It’s not that they’re looking for revenues only, they’ll say, but really it’s all about “leveling the playing field” for local citizens and businesses. The playing field is not level, if the Amazon’s of the world have a built-in advantage of not having to charge sales tax.

Tear Down This Wall!

If it were up to the States, they would exempt their own citizens from paying any tax and impose their entire budgetary requirements on non-citizens. If you want to business in our state and “exploit” our resources and services, then you’re going to have to pay! But fortunately for the prosperity of our nation in general and particularly for companies trying to do business in more than one state, there is this clause (Article I, Section 8, Clause 3) in the Constitution that reserves the right to the US Congress to “Regulate Commerce … among the several States…” This is commonly referred to as the “Interstate Commerce Clause” and is widely interpreted to mean that states can’t burden interstate commerce with discriminatory taxation.

Suffice it to say that there is a continuing tension between “leveling the playing field” on the one hand and “taxation without representation” on the other. Man has stepped foot on the Moon and the Wall has come down in Berlin, and so maybe this issue will be resolved, but peace may come to middle east first.

The bottom line is that faced with revenue shortfalls and the resultant budget deficits, state revenue departments and state legislatures are scrambling. They are now and will continue to push the envelope on asserting that non-citizens have nexus in their state. Once they win the nexus battle, then they can force companies to collect and pay their taxes.

Here’s a Few Other Recent Developments in California and Colorado

COLORADO: An interesting bill has passed the Colorado House and the CO Senate (with significant amendments to be resolved). The amended Senate version would create nexus for a retailer who is part of a controlled corporate group with a component member who has a retail presence in Colorado. This is not all that revolutionary. Affiliate nexus (as that term is more commonly understood in the state taxation parlance and not in the NY definition) is not a new approach. But here is the interesting part. Any retailer who has nexus as a result of being part of a such a controlled group, would now have (if this bill is signed into law) some new notification and filing responsibilities. First, the seller would have to notify their customers that sales tax is due on those purchases. What if they don’t? They would be subject to a $5 penalty for EACH failure. That’s big. Second, the seller who does not collect tax, but has nexus through this attribution approach, would also have to send a separate mailing (by first class mail) to each of its customers in CO a schedule showing the detailed purchases they made. This mailing would have to be done by January 31 of the year following. That’s huge.

But wait, there’s more!

Third, and here’s where this is really big, this retailer would also be required to file an annual statement (by March 1 of each year) summarizing the total CO purchases made by each purchaser. Failure to do so, carries a $10 penalty for each purchaser left off the filing. Of course, it’s easy to see the CO tax collectors using this information to dash off a tax bill to all the people on that list. This bill will be watched carefully.

CALIFORNIA: California has passed a new use tax registration requirement. It is for all business that: (1) have $100,000 or more in gross sales; (2) not already registered with the SBE (State Board of Equalization — CA DOR for sales taxes); (3) made purchasers from non-CA sellers who did not collect CA tax; and (4) used, consumed, gave away, or stored the purchased items in CA. If this applies to you, you would be required to file a report by April 15th each year. Oh, and one more thing — CA is a tough place to do business. Even federally exempt 501(c)(3) entities with over $100K in receipts have to register. If this applies to you, when you get registered, it you’ll also be required to file for 2007, 2008, and 2009 also. And yes, penalty and interest will apply. But you may request relief from the penalty. See this link for more details. Yikes. If you have concerns here, let us help. We can help you minimize the damage this could cause your business.

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