In an effort to find new tax revenues several states have tried to expand the application of state sales tax to many out of state businesses. New York and Rhode Island are the only states that have successfully passed what the New York Post has dubbed the "Amazon Tax". To understand the Amazon Tax, it helps to understand a legal concept called nexus. Nexus is based on a Latin term meaning to bind. (you know how lawyers love to use Latin words) Nexus means to have a connection or link.
When you talk about nexus and sales tax, it means that a state can require a business to collect tax on products sold in or shipped to that state when the business has nexus (a link or connection) in the state. The flip side is a state can not require sales tax collections from a business that has no connection (nexus) in that state. That is why you can order a camera from an out of state vendor and avoid paying sales tax. If you purchased that same camera at a local store you would be charged anywhere from 3%-7.25% in state sales tax. In reality you would pay much more, because most states also allow local governments, such as cities and counties, to add another 1-2% tax onto your final bill.
To have nexus usually requires a business to own assets or have direct employees working and living in a state. What New York has done with the Amazon Tax is attempt to expand the concept of nexus by claiming a connection if an out of state vendor advertises it’s products through independent business people known as affiliate marketers. For the 2009/2010 fiscal year, the State of New York expects to raise an additional $1 billion in revenue from changes to New York sales tax laws.
Amazon.com and Overstock.com are two big vendors in the affiliate market place. Both companies have taken a stand against the new tax by canceling all affiliate marketing programs in New York and Rhode Island. According to 5Star Affiliates, they have also threatened to cancel agreements in other states such as North Carolina, Florida, Illinois, Virginia and Wisconsin that are considering similar changes to sales tax laws.
By canceling affiliate programs state by state, not only does the state miss out on the sales tax, but they also loose any income tax on affiliate commissions earned in the state. In effect New York, by trying to increase its tax revenue may have lowered it instead.
Bowing to pressure from businesses, the governors of California and Hawaii vetoed so called 'Amazon Tax' bills.
The tax is directed at sales tax which is typically charged on sales of products and does not apply to advertising revenue. eBay sellers or anyone who ships products to out of state customers need to keep records of where their income is generated. You can use online sites like Outright and Freshbooks to track sales by customer. In Outright you create income categories on the settings tab to track sales by state. When you set up a new customer in Outright, go ahead and enter all the details for address, city, state and zip as some states charge different tax rates for different cities.
If you are interested in updates on the Amazon Tax in your state, the Performance Marketing Alliance tracks the latest affiliate tax news on their blog.
