Succeeding in Your Business by Cliff Ennico

"I started a small online retail business earlier this year. I understand that I have to collect and pay state sales taxes whenever someone buys from me who also lives in my state. But my business is growing, and I have customers now in virtually every state in the United States. I am hearing more and more that I may have to collect sales tax in some of these other states as well, but nobody seems to have a clear answer on this. Where's the reality here?"

The short answer is ... the reality is changing, and few professionals have a clear grip on where the law is going in this area. Since the vast majority of e-commerce transactions are interstate in nature, and since the U.S. Constitution prohibits states from imposing "burdens" of any kind on interstate commerce, the vast majority of e-commerce transactions do not result in taxes of any kind being paid to state and local authorities.

Needless to say, state and local governments have lost billions of dollars in sales tax revenue because of this, and they are desperate — truly desperate — to get some of that money back in ways that do not violate the U.S. Constitution. A handful of states are even trying to get you to pay state and local income taxes when you sell lots and lots of stuff to their citizens.

Two cases in point ...

In July 2009, Connecticut passed a law requiring "any company that derives income from sources within this state ... evidenced by a purposeful direction of business toward this state, examined in light of the frequency, quantity and systematic nature of a company's economic contacts with this state, without regard to physical presence," to register and pay Connecticut state income tax on their sales to Connecticut residents.

Now, you tell me what a "purposeful direction of business" is. Go ahead, I double dog dare you.

It will be a while before the Connecticut tax authorities pass regulations making some of this clear, but we can take a couple of stabs in the dark:

Merely listing something for sale on your website, or on major e-commerce platforms such as eBay, Amazon and Bonanzle, should not be viewed as a "purposeful direction of business" to Connecticut residents, even though you may have some Connecticut buyers, because anyone on Earth can view your listings.

However, taking out banner ads on websites (such as those of the University of Connecticut's "UConn Huskies" women's basketball team, or the "Bridgeport Bluefish" minor league baseball team based in Bridgeport, Conn.) that target primarily Connecticut residents, is likely to be viewed as a "purposeful direction of business" to Connecticut residents.

An e-commerce listing that offers "10 percent discounts to Connecticut residents who buy before Dec.

24," coupled with a targeted e-mail "blast" to 100,000 Connecticut residents, is almost certain to be viewed as a "purposeful direction of business" to Connecticut residents — if you're doing stuff like that, you had better register with the Connecticut tax authority now.

The second new law comes from New York. Effective June 2008, if you are operating a business in New York that is an "affiliate" of one of the major e-commerce platforms, and you sell more than $10,000 worth of goods and services to New York residents during a rolling four-quarter period, the e-commerce platform is required to collect and pay New York state and local sales taxes on those sales (which, of course, will be reimbursed by your business).

The law does not define what an "affiliate" is, but the clear target are e-commerce platforms such as Amazon and Bonanzle where you create an "affiliate" page and sell goods through the e-commerce platform. In fact, accountants and tax lawyers of my acquaintance in New York refer to the new law colloquially as "the Amazon bill." It is not 100 percent clear if eBay sellers are "affiliates" under the law, since eBay customers buy directly from your business and not through eBay itself. EBay does, however, offer an affiliate program to its members (details are at http://pages.ebay.com/help/sell/affiliate-program.html) as well as co-operative marketing programs such as the eBay Partner Network (www.ebaypartnernetwork.com) so participants in these programs probably need to ask eBay whether the law applies to them.

The reactions to the New York law so far are mixed. After losing a legal battle challenging the constitutionality of the law in New York, Amazon.com has said it will comply with the law and collect sales tax from its New York affiliates who sell more than $10,000 worth of goods in New York each year. On the other hand, Overstock.com simply terminated all its New York affiliates because it didn't want to incur the cost of putting systems into place to comply with the law.

This will be a fast changing area of the law in coming years, so look for updates in future columns.

Cliff Ennico (crennico@gmail.com) is a syndicated columnist, author and former host of the PBS television series "Money Hunt." This column is no substitute for legal, tax or financial advice, which can be furnished only by a qualified professional licensed in your state. To find out more about Cliff Ennico and other Creators Syndicate writers and cartoonists, visit our Web page at www.creators.com.

COPYRIGHT 2009 CLIFFORD R. ENNICO

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