Executive Summary
Analysts estimate that national, state and local sales tax losses on e-commerce will grow to $11.4 billion by 2012. In the middle of the worst economic downturn since the Great Depression, states are pressed to find additional sources of revenue. With e-commerce sales continuing to rise, and with both purchasers and sellers usually avoiding tax liability for out-of-state internet transactions, states are eager to close the gap. To do so, states appear to be following one of two distinct paths. First, states are joining the Streamlined Sales Tax Project (“SSTP”), which is a multi-state effort to standardize the collection of taxes from e-commerce. Second, states are acting unilaterally and creating tax laws that will bring in tax revenue from e-commerce transactions. One such example is a statute that was recently enacted in New York that requires out-of-state online retailers to collect New York taxes if the business has New York-based affiliates who collectively generate more than $10,000 worth of business in a given year. Amazon.com sued the State of New York, arguing that the statute was unconstitutional, but the court disagreed with Amazon, holding that Amazon’s in-state affiliates created the requisite nexus allowing New York to require Amazon to collect sales taxes. As discussed more fully below, the Amazon.com case gave momentum to the SSTP.
In light of the SSTP’s growing momentum and New York’s recent Amazon.com decision, online retailers should take three actions. First, online retailers should be attentive to developments concerning the SSTP and where states, like New York and North Carolina, are acting unilaterally to pass legislation. Second, online retailers should conduct a detailed examination of their business practices and attempt to mitigate areas where a nexus might be unexpectedly asserted. Third, online retailers should conduct a cost benefit analysis concerning the business value and profitability of affiliate programs in each state.
