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Online Sellers – The Sales Tax Monsters Have You in Their Sights.

July 1st, 2011 by Skip McGrath

Sales Tax Issues for Online Sellers

Yesterday I wrote about Amazon canceling their affiliate program in California (scroll down to the next post) when Governor Jerry Brown signed a law that would require Amazon to collect and pay California sales tax on any sales that came from affiliates located in California.  They are the fifth state to do so. (IL, RI, CO & NC are the others).  Amazon promptly retaliated by canceling over 25,000 affiliates in California.  So, not only will CA not be collecting the $200 million in sales tax they were hoping for, they will also lose the income tax that Amazon’s California affiliates pay.  Way to go Governor Brown.   You should become an economist.

Sales Tax Laws and The Online Seller

This whole issue is somewhat confusing so let me try and explain.  Once you understand this you will realize just how stupid these laws are:

The issue revolves around what is called a  “Nexus.”  In sales tax language, Nexus means you have a presence in a state for tax purposes.  The way sales tax works, if you are located in one state and ship goods to another state, then you do not have to collect sales tax.  But if you sell and ship something to someone in your state, then you must collect and pay sales tax on that transaction. So far, so good. I am located in Washington State, so I only collect and pay sales tax when I sell something to someone in WA State.

But what if you are located in Colorado and you keep your goods in an Amazon warehouse in Arizona (This is done by many Amazon FBA Sellers).  Now you have a “Nexus” in Arizona.  So, in addition to collecting and paying sales tax on all in-state Colorado transactions, you also have to collect and pay sales tax on Arizona transactions when the buyer is located in Arizona.

Affiliates and Sales Taxes

So how does this affect affiliates?  Well, California, says that an internet presence is the same as a physical presence.  Here is how the theory goes: Let’s say you are an Amazon affiliate living in California. Someone in Virginia or Florida (or any other state), reads your blog, or a link you posted on Facebook. They click on the link which is your affiliate link to a product on Amazon and they buy the product.  Now, California says, since that affiliate is located in California, Amazon has to collect and pay sales tax to California on that sale, even thought Amazon is shipping from Washington State to Virginia.

It gets worse: Let’s say you have a website selling cooking gadgets.  To get traffic you purchase ads from Google. Since Google is located in San Jose, CA, the state of California says you have a nexus there and you have to pay CA sales tax on all of your sales, no matter what state they are shipped from or to.  What if I am in Washington State and host my website with a company such as Hostsearch.com which is located in California? Does that give me a Nexus in California?  California thinks so.

I am waiting to see the impact on eBay sellers.  Will California say that since eBay is located in California that all eBay sellers have a Nexus in CA and we have to send the State of California sales tax on all of our sales?

Now you see how crazy this can get.  If you are planning on shopping this weekend – here is a list of stores who are lobbying for these taxes because they feel they are at a disadvantage with online marketers.

  • Wal-Mart
  • Home Depot
  • Loews
  • Sears

There are quite a few others, but these are the big four.  Between them, they have spent hundreds of thousands of dollars lobbying politicians of both parties to impose sales taxes on all online sales.  And they aren’t going to stop until every online business has to collect and pay sales tax on every sale they make to anyplace in the US.

How Affiliates in California (and the other affected states can get around the law:

All you need for Amazon to reinstate your Amazon affiliate contract is a mailing address in another state.  Just go to MailLink in Nevada. For just $10 a month, they will give you a business address and collect and forward your mail. (You have to pay the postage on the mail they forward).  And, they accept PayPal.

There are companies like this all over the US. There are UPS stores in almost every state and they also offer this service, although they are a bit more expensive.

I like Nevada because the State is very business-friendly and it is unlikely they will ever institute a tax law as stupid as trying to collect sales tax on affiliate sales.

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Blog Catalog is a blog for bloggers and occasionally their interview their bloggers to share their knowledge with other members.  I did the interview a couple of days ago and it was posted today.  Here is the link to read the interview:  http://blog.blogcatalog.com/2011/skip-mcgrath-ebays-power-seller-online/

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Learn how to sell on eBay, Amazon and the Internet with your own Online Selling Coach.  Our experts teach and answer questions about all aspects of online marketing.  WWW.OnlineSellingCoach.com.

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