Amazon and On-Line Sales Tax Rules

Twenty years ago, most commerce and sales of end user and retail items were done in store. The sales tax was assessed and paid at the point of sale every time in an essentially invisible transaction. Retailers and consumers never thought twice about the experience of a sales tax transaction, it was paid, over-with, and done. A lot changed since then.

Between then and now, computers became cheap, the Internet blossomed, and credit cards became widely popular. As a result of cheap technology combined with an easy way to access goods and on credit, e-commerce has exploded. More people order items online each year than in any given past year. Additionally, importation of goods has increased as well driving down prices even further for electronics, clothing, appliances and many other items.

While this has been a good time for the consumer, it has wreaked havoc on retailers. Retailers such as Sears, Gander Mountain, and J.C. Penney have become the face of the crisis. Same store sales in nearly every retail category are falling against year-by-year numbers and states are feeling the burn.

Many states have enacted tax laws and regulations to combat loss of revenue in the form of Amazon laws and online retail sales taxes. If the retailer ships an item to a state or province in the United States, it is liable to comply with that state’s online sales tax rules. For some states, there is not a rule. Most states by this time do have a rule in place that the seller should be aware of.

While this is ordinarily not a federal tax return issue has now become an issue for federal tax return consideration. If your client or the seller of a good sells an item over state lines, a tax is probably due depending on which state you sell to. This becomes important on the federal tax return because 1) you have to collect the tax, 2) record the receipt of the tax (there are two ways of doing this), 3) Pay the money to the respective taxing authority, and then 4) account for the payment (again two ways dependent on how the receipt was recorded). Items 2 and especially 4 are items that appear on the federal return no matter what kind of company they have whether it be an LLC, sole proprietorship, or any kind of corporation.

If you client does not record the tax expense or payment, that deduction is lost and it will affect the federal return even if the taxing authority discovers and demands payment years later.

If you sell goods over state lines or have clients who do, expect this issue to arise. It is a state issue, but it affects the federal return.

The Center routinely advises on these matters and performs business valuations and business succession services and more. Please call us at (618) 997-3436 to talk to our attorneys and CPAs on this or any other tax issue.