SALT TAX: Online Sales Tax – Caveat Venditor…
09.21.15 | SALT Chat
Last week’s post discussed how state tax departments are closing sales tax loopholes of online retail. This week, we’re examining this from the online merchant’s perspective. As of 2008, and New York’s enactment of the “Amazon Law,” a retailer with no physical presence in a state may incur sales tax liability through an unfulfilled collection obligation, through one simple “click.” Take the example of a New York-based ski club and its relationship with a Vermont-based online merchant.
Ski Goods Inc. enters into an agreement with the ski club, which provides that an advertisement for Ski Goods will be displayed on the ski club’s website. Clicking on the ad directs customers to Ski Goods’ website. In exchange, Ski Goods pays the ski club a commission based on sales generated through the link.
“So what?” you say. “Ski Goods has no physical presence in New York and a New York-based customer would have to accrue use tax on any purchase.” But New York State didn’t stop there.
Ski Goods is now presumptively soliciting sales in New York through its new found agent, the club, and must charge New York sales tax on any taxable sale to a New York customer. Ski Goods is also liable for any tax not collected on its New York sales, a harsh reality for a business with no physical presence in New York. While Ski Goods can rebut New York’s presumption, doing so retroactively is nearly impossible without specific planning in advance.
Ski Goods’ agreement with the club must explicitly prohibit the club from engaging in any solicitation activities in New York that refer customers to Ski Goods. Ski Goods must also demonstrate that the club has complied with the prohibition by requiring the club to submit a signed statement to Ski Goods certifying its compliance.
The lesson here? Caveat Venditor – Don’t overlook sales tax when entering into arrangements with retailers that cross state lines. Retailers must revisit all online advertising agreements with vendors and others outside their home state to ensure the necessary language is in place.
Questions? For help understanding how online sales tax can affect you, please contact us.
Wayne Berkowitz, a tax partner and head of the State and Local Tax Group at Berdon LLP, advises on the unique requirements of governments and municipalities across the nation. Jesse Cohen, J.D., a state and local tax associate, contributed to this post.