Online Tax Drives New Complexity and Costs: Havens Remain

By Dave Wieneke | in eCommerce, Personal jurisdiction, Tax law | 25 Aug 2008 | 4 Comments

As state real estate and income tax collections head downward, tax collectors have turned their gaze toward online commerce. At the same time, a few states are emerging as havens from taxation.

New York Goes After Affiliate Marketers with the Amazon Tax
New York implemented the so-called Amazon tax. It seeks to change the common interpretation of online tax law, which holds that states don’t have jurisdiction to force sites to collect taxes unless the site has a sufficient presence, or nexus, such as offices or employees, in the taxing jurisdiction.

The New York legislature voted that companies running affiliate marketing programs should be considered as doing business in the jurisdications affiliate websites are operated from. This idea of affiliate liability stretches though issues such as online tax and liablity for trademark infringement by affiliates. Amazon and others are in court fighting this, but New York’s actions have forced many e-commerce sites to start collecting taxes.

Taxing Music Downloads: The iTax
Five states have already levied iTaxes to tax downloads: Nebraska, Tennessee, Indiana, South Dakota, and Utah. Eight states in all have proposed such taxes this year, while others, such as my home state, Massachusetts, are considering this as one way to overcome revenue shortfalls. This failed in California, but expect a second attempt at taxing iTunes later this year.

Of course, like New York’s online taxes, the problem lies in compelling out-of-state websites to collect taxes for the state or municipality.

Chicago Goes After StubHub and eBay for Amusement Tax
The legality of reselling tickets online has been a favorite topic on this blog. In Chicago, that activity is taxed, and the city claims that any business anywhere reselling a ticket for an event in their jurisdiction needs to collect amusement tax for them. That’s not so far fetched; Boston claims that anyone reselling a ticket for a Boston event is guilty of scalping.

Georgia Wants Room Taxes from Online Travel Sites
Over the last several years, Georgian courts have tried to get municipalities to work out a system to collect room taxes from online booking sites. The sites generally contend they are immune from tax requirements, so this seems headed back to court.

Finding an Online Tax Haven
If you run an entirely online business without a nexus of employees or offices, then you can pretty much pick where you want to incorporate as your only nexus. Nevada and Wyoming are tax havens, which can provide a relatively tax-free home state for incorporations. There are various techniques to keep company proceeds within these states, allowing online business operators from having a taxable nexus in less tax-friendly jurisdictions.