Amazon Tax Hits Illinois; Legislation Would Enact Virtual Nexus
Tuesday, March 01, 2011
In Illinois, legislation that would shut down many small internet businesses has been passed by both houses and sits on the governor's desk for signature. Dubbed the Amazon Tax, the new law would require any non-Illinois seller to collect Illinois sales tax if that seller acquires customers through a link on the Internet website of the Illinois business. This requirement applies even ‘though the out-of-state business has no other presence in the state. We refer to this emerging concept as “virtual nexus”.
In a blog published last fall, Business Activity Taxes: The States Reach Out, we noted growing attempts by states to increase revenues by attempting to tax interstate transactions. Under the concept of “economic nexus”, some states have asserted their right to tax any transaction that touches the state, whether or not the parties are physically located in the state.
Whether “virtual nexus” or “economic nexus”, these concepts demonstrate that states are becoming more aggressive in their attempts to tax interstate transactions. Clearly, this overreaching will result in undue burden on small businesses which will be faced with compliance requirements from multiple jurisdictions.
To better understand this interstate tax struggle, a quick review of established law is necessary. In 1992, the U.S. Supreme Court held in its Quill decision that a business must have a physical presence in a state in order for that state to require collection of sales or use tax on purchases made by buyers residing in the state; this rule became known as the “physical nexus”. The rationale for the “physical nexus” requirement is that it is principally unfair for a state to require a business to collect sales and use taxes when that business has no physical presence in the taxing state.
So while the Supreme Court's Quill decision established a clear rule for the sale of goods, this decision did not address services provided across state lines. And as an increasing array of services became available online, some states distinguished the Supreme Court's Quill decision by implementing the economic nexus test for transactions that principally involved the provision of services. Now, Illinois (and a few other states) are trying to bypass Quill altogether by invoking a “virtual nexus” test, even for the sale of goods.
We can make a few observations from all this:
· First, technology advances far outpace the ability of the law to keep pace.
· With 46 states facing budget deficits, they will continue to look for innovative ways to increase revenues
· Interstate taxation is complicated by a patchwork of laws, regulations and rules enacted by the states.
· As this trend grows, businesses will be directly impacted by increased compliance costs.
· The imposition of a new tax on consumers is not what our economy needs.
· This likely will open up a flood a new litigation that could prove costly for states, local governments and companies.
To address the “economic nexus” theory, CompTIA has urged Congress to enact distinct “physical nexus” requirements as a prerequisite for the taxation of interstate business activities. This would have been accomplished by Business Activity Tax legislation introduced in the last two Congressional sessions.
As for the “virtual nexus” issue, we also call for steps that would reinstate the “physical nexus” requirement established by the Supreme Court in its Quill decision. Litigation is ongoing as Amazon sued New York State when a similar law was enacted there in 2008.
The bottom line is that it is basically unfair to require a business to collect and pay taxes to a state unless that business has some substantial nexus to the state, such as physical presence. This unfairness is multiplied when small businesses become subject to a multiplicity of taxing jurisdictions.
So, while CompTIA recognizes the sovereignty of the states to tax, we also see a strong need from the business community for clear rules, certainty and simplification of compliance requirements. What we really need is consistent tax rules across state lines. But until that happens, we will push for steps to protect businesses from increased compliance costs resulting from reporting to multiple taxing jurisdictions.