Amazon.com & You - Internet Sales and the Long Arm of the Tax Man

by Michael J. Fleming

We all have heard or read about the plights of the states in the recent economy. Revenues from all sources are down and states are desperate to increase them. Virtually all states are becoming more aggressive in their collection efforts and many are looking at creative new statutes or ways to reinterpret those already on the books. One prime example of these efforts is the Internet. Most of the news about the Internet currently revolves around Amazon, with some statutes actually being dubbed the “Amazon Laws”. However make no mistake about it; it’s not just Amazon the states are thinking about. If you are selling or buying on the Internet the states have their eyes on you also.

The reasons so many states are looking at Internet sales are because of their explosive growth and the fact that sales or use taxes often go uncollected on these transactions. Experts estimate that the uncollected taxes for these transactions will total $18 billion dollars this year and predict that by 2012 the number will grow to $23 billion. The cumulative amounts for the period of 2009-2012 could reach $55 billion dollars. It’s no wonder the states have their eyes on the Internet; capturing these uncollected taxes would go a long way to closing their budget gaps.

In their pursuit of this Internet treasure the states are taking a number of different approaches. The states easiest to follow are those that have passed new statutes. There are currently 3 of these states that have passed “Amazon Laws”; NY, NC and RI. One of the major components of all three of these statues is what is called “Click-Through Nexus”. This nexus occurs when the seller enters into an agreement with an in-state resident, where the resident is compensated for referring customers directly or indirectly to the seller. One form of this is an affiliate program where a potential customer clicks on a resident’s link and is redirected to the seller’s website. The laws are currently being challenged in court and many tax professionals have taken a wait-and-see approach.

While the professionals may be waiting, the states are not. According to BNA’s 2010 Survey of State Tax Departments, 14 additional states believe that their existing statutes allow them to pursue taxes through this “click-through nexus”. The approach of these states is much more stealthy and without the information contained in the BNA survey, many would be hearing about this the first time through an audit. The states referenced in the BNA survey are: Arizona, the District of Columbia, Florida, Iowa, Maryland, Missouri, Nevada, New Mexico, North Dakota, Pennsylvania, South Dakota, Tennessee, Texas, and Washington.

In addition to “Click-Through Nexus” many of the states are looking at (or have already passed in the case of Colorado & Oklahoma) “Sales & Use Tax Notice and Reporting Requirements” for transactions where sales taxes are not collected. Quite simply states are requiring sellers without nexus to inform purchasers that tax is due on individual transactions as well as provide year end summaries with instructions on how the taxes should be paid. There are also requirements for reporting these sales to the state and provisions for penalties for non-compliant sellers.

If the new statutes were not enough, states are aggressively searching for companies that have “old-fashioned nexus”. This nexus is caused by the usual myriad of ever-evolving activities whose importance in creating nexus can vary from state to state. Most of these activities are not directly related to the Internet and are conducted by other parts of your company, but could impact the sales tax aspect of your Internet business anyway. These activities are too many to list entirely but here is a quick list of 10 potential nexus-creating activities:

1. Owning or leasing property in a state.
2. Owning or leasing equipment in a state.
3. Travel into a state to perform sales.
4. Travel into a state to perform services such as installations, training, repair, etc.
5. Travel to trade shows in a state.
6. Having payroll in a state.
7. Having agents or contractors in a state.
8. Licensing intangibles to others in a state.
9. Delivery into a state in a company owned truck.
10. Doing business with a bank in a state.

Let’s not forget those issues that are not nexus related. Issues like changing taxability (software especially), delivery methods (downloads vs hard copy) and of course drop-shipping issues. Are you responsible for the taxes on a sale someone else makes? You could be. If your purchaser is not registered in a state and you have nexus in that state you may be liable.

If you are beginning to wonder if you need to take another look at how you are approaching these issues pat yourself on the back. All too often we speak to very smart people at companies of all sizes and types, who work at all levels of the organization that we believe are much too complacent. They assume that if their system has worked up to this point why change it? Some of them are right. They stay on top of the ever-changing environment and update their policies continuously. Others find out the hard way (usually in a Sales/Use Tax Audit), that just because it worked in the past doesn’t mean it’s going to work now.
Andy Johnson, a founding partner at Peisner Johnson & Company, believes that, “The greatest tragedy when it comes to sales tax is neglecting to collect sales tax on a taxable item at the point of sale, only to have it come out of your pocket later.” Because unlike an income tax which comes out of your pocket no matter when you realize it, sales tax that would have been paid willingly (if not grudgingly) by your customer at the time of the sale, ends up coming out of your pocket 3 to 5 years later. And, don’t forget to add the penalty and interest insult to the injury. Can you afford not to be compliant?

Ok you’ve started to wonder, now what do you do. Here are some suggested actions:

1. Educate yourself - Start with charts and matrices, attend webinars, contact the states.
2. Ask questions – Of your staff, your accountants, everyone. You can never ask enough questions.
3. Evaluate - Don’t assume your accountants or staff are up-to-date. They usually are multi-tasking.
4. Consult an expert – There are some excellent service providers that focus on issues like these.
5. Train your people – Knowledge is power. Empowered employees can help prevent problems.

There are a few good firms that can help you educate yourself or provide additional support as needed. Peisner Johnson & Company offers many free services designed to make your life easier. One of those free services is that we will provide you with a chart or matrix on just about any topic you would like. We also offer a free service called quick questions. If you have questions that we can answer without the need for research we will do so free of charge.

There are currently so many issues effecting Internet sales it is hard to cover them all or in great detail in a single article like this. It is our intention to alert you to as many of these issues as we could. If you have any questions or would like additional information please let us know. We can be reached at 800-940-9433 or by email at taxquestions@peisnerjohnson.com. Peisner Johnson and Company, founded in 1992, is the largest national CPA firm that is focused entirely on solving state and local tax issues.

States Are Targeting You?

Which States Have Set Up Nexus Teams?

We subscribe to some of the best resources available today when it comes to state and local tax research. Chances are, whatever question you could possibly have, we can find the answer. Today, we thought it would be interesting to highlight the issue of Nexus and which states have set up teams with the express purpose of finding companies who have nexus in their state.

Nexus Teams Targeting You?

If you operate in multiple states, then you need to be ever vigilant in these difficult economic times because it appears states are being much more aggressive in looking for companies making sales in their state hoping that they can force them to collect sales taxes for the states. To do so, they must first determine that you have Nexus in their state.

So what is NEXUS? nex-us n. pl nexus or nex-us-es - a means of connection; a link or tie.
Your business has nexus if you have established a connection with the state in question. Clearly, physical presence in a state, in the form of a store or office, establishes nexus. If you have a physical presence in a state, take notice: You now have the responsibility to collect taxes for the sales you have in that state if what you sell is taxable.
Unfortunately, the laws do allow states to force you to collect tax for them and to penalize you for not doing so if you have nexus. The courts have long agreed that the government is well within its constitutional authority to impose this duty on sellers with a physical presence in their state. Likewise, a state can also force you to pay tax on the taxable purchases you make in their state.
With these laws in their favor and in their fiscal desperation, states are working harder than ever to find more tax collectors. I thought it would be interesting to note which states admit to having a special team that is specially set up for this very purpose.

First of all, let's look at the top 5 states: CA, TX, FL, OH, NY and IL. As it turns out, only Texas and NY have "Nexus Teams". According to my research 25 other states also have "Nexus Teams".

We Have a Chart for That -- You might call it a Taxability Matrix or a Taxability Chart, the name is not important. We have various tax matrices already put together based on survey questions made to the states each year. This particular matrix addresses this question of whether the state has a designated "Nexus Team". We offer this basic research to you at no charge for up to 10 states. If you like to receive one of these charts, please email us here and just request it. But remember, this chart is the result of a survey performed by the states and is research provided to us by CCH. The charts are fantastic resources, but cannot substitute for professional advice based on your specific facts and circumstances. By all means, have a look at the charts we can provide but then do your own research and consult a professional.

What's the Best Way to Get Answers to Your State Tax Questions?

CALL THE STATE? -- This may not be the best thing to do. Clients frequently remark that when the call the state for guidance, they often get hazy and even conflicting answers. We usually say that it's not that people at the state don't know what they're talking about. In fact, if you get a hold of the right people with expertise in your industry, and they understand your question correctly, then you can almost always trust the answer you get from them. Just try to get the answer in writing, so you're protected in the event of a future audit.

But you have to get the right people and you have to phrase the question appropriately using correct terminology so that misunderstandings are avoided. Certain words carry meaning in the sales tax world that might not be immediately apparent to a non sales tax person. Sales tax is much more a "form over substance" type of tax than income tax and how things are worded in a contract or invoice can be crucial to the taxability. How a question is worded can also make a big difference. Don't get me wrong, I'm not saying there's some sort of trick or code language that you must conform to or else, I'm just saying that you want to understand all the implications of the words you choose in asking for guidance so that you get the most accurate answer.

Plus, how do you know if you got the whole answer on your situation? You may have described your facts and circumstances accurately but left out something that you did not think was important. The answer you get would be dependent on the facts you presented. But in reality, the answer you get may not be appropriate when you consider all the relevant facts.

GOOGLE IT? -- With so much information available on the Internet these days, you can Google your question and chances are, you'll find something that seems to match your situation. The problem here, of course, is, does this answer really apply to your situation? Is there another contradicting ruling or law on this matter? Has this item you found been superseded?

GET A RULING? -- What if there is no law, regulation, court case or state ruling that addresses your exact situation? Yes, this does happen and quite frequently. State revenue departments have not produced answers to every possible question. This is in stark contrast to the IRS, where it seems that no matter what situation you face, there is a regulation or revenue ruling or court case that addresses it on point -- it's just a matter of finding it. At the state level, we frequently run into situations where there is simply no documented answer to your question. In this case, we usually recommend obtaining private letter rulings from the revenue departments. Each state has their own procedure. We usually recommend only seeking a letter ruling where you have already discussed the question with a subject matter expert at the state, and gotten a pretty good idea of what you're going to get in the ruling. It's not always possible to do, but you don't want bad precedent, if you can help it.

ASK THE AUTHORITY? -- Have you tried calling the state or just searching the Internet and came away wondering if you got the right answer? Have you considered asking a professional? You probably have, but hesitated, considering the cost. Well, this is what we do -- We Solve State Tax Problems.

And, we don't always charge for this service. How can that be, you ask? We subscribe to just about every service available and can find just about any law, regulation or court case that would bear on your facts and circumstances. And more than that, we use our many years of experience to evaluate your facts to form the correct questions. With that experience we can draw conclusions you can rely on. And we maintain contacts with key state personnel that we can confirm how the state will treat certain transactions that fall in gray areas.

Sometimes we just flat know the answer to a question you have. We always tell our clients: "If you have a question, just call us or email us. If we can answer you off the top of our heads, we're not going to charge you. If we need to do some research, we'll tell you before we do the work and seek your approval before we do it." You can expect no surprise invoices from us.

So What Questions Do You Have?

Like we said earlier, we can deal with any state tax question you can think of. Of course, the answer to many questions we get is, "it depends!" And that may sound like a cop out, but it really does depend. The answer depends on which state we're talking about number one and then on other possible variances in the facts. One of the helpful resources we subscribe to is provided by CCH. And one of the resources they give us access to are certain charts or tax matrices.

CAUTION ON CHARTS --A big word of caution is in order when it comes to charts. A chart is just a starting place when you want to do some research, and not the final answer by any means, but it's still interesting and insightful. One particular chart they provide is unique in that it is based entirely on surveys of actual state tax departments and as such it is a good representation of state tax policy. But it is just state policy and this survey is not binding on them. Sometimes, a state's own policy is at variance with the law, so take this with a grain of salt. But, it still makes for good state tax conversation. We're here to help, give us a call.

Certain Illinois Taxpayers May Lose Millions of Dollars on July 1, 2010

Illinois Taxpayers May Lose Millions of Dollars on July 1, 2010

The State of Illinois Manufacturer's Purchase Credit ("MPC") is unique among state incentives. Many Illinois taxpayers might qualify for this credit. If they do qualify, they must file the appropriate forms by June 30, 2010, or the money is lost forever.

What is the MPC Credit?

The MPC is earned when a manufacturer or graphic artist purchases manufacturing or graphic arts machinery and that equipment qualifies for the existing sales/use tax exemptions. The credit is equal to half of 6.25% state sales tax that would have been owed if the purchase was not otherwise exempt.

The MPC Credit may be used to pay state sales tax or use tax on future purchases of qualifying production-related tangible personal property. All unused MPC earned expires the last day of the second calendar year following the year in which the original tax exempt purchase was made. MPC may not be transferred to another party.

What Must You Do?

File a Illinois ST-16 Annual Report of MPC earned with the Illinois Department of Revenue by June 30,2010 for all qualified purchases made in 2009. In addition, the Illinois ST-17 Annual Report of MPC used should also be filed.

We Can Help

Facing a time crunch? Not sure if you qualify or which purchases you make meet the tests? We can help you. We will review the prior year's capital purchases and Accounts Payable files to identify qualifying purchases. We will then prepare the ST-16 Report of MPC earned along with a ST-17 Report of MPC used on your behalf.

PJCo will also review the credit earned to ensure maximum usage of the credit. By reviewing your AP files we can identify transactions where MPC can be applied. If we discover tax was paid to a vendor or State we will prepare a refund to recover the taxes paid.

How Soon Can You Actually Get This Money in Your Pocket?

It's one thing to qualify for a credit and file all the right forms -- it's quite another to actually get the cash in your hands. The state of Illinois doesn't just send you a check. The credit has to be applied against other taxes owed. If it isn't applied to some other tax in a timely fashion, it's lost and all that work was wasted. This is where our experience and services become valuable in assisting your company in using the credit before they expire. We know exactly where to look to apply the credit on future or past purchases. Eligible purchases of the credit can be applied to many areas to include production related tangible personal property that is:

* Incorporated into real estate within a manufacturing or graphic arts facility.

* Used or consumed in activities such as pre-production, material handling, receiving, quality control, inventory control, storage and staging, and packaging for shipping purposes.

* Used or consumed Tangible Personal Property for Research and Development.

What Should You Do Now?

Contact us today to arrange a review of all purchases made in 2009. Remember there is no extension available to file for this credit and the return must be filed by June 30, 2010. There is still time for us to marshal our resources and complete this critical filing on your behalf.

by Brad Dent