Cliff Ennico

Thanks to a new law in California, the days of selling online without having to pay sales tax are numbered.

Since 2008, a number of states have attempted to impose their sales taxes on Internet commerce, most of which involves sales across state (and often national) boundaries.

States try to tax e-commerce in a number of ways, but the approach that's gotten the most publicity is the so-called "Amazon tax" adopted by New York, Rhode Island, Illinois, North Carolina and a couple of other states. In these states, Amazon.com, Overstock.com and other e-commerce platforms that allow small businesses to sell on their sites as "affiliates" are required to collect and remit state and local sales taxes if an affiliate sells more than a certain dollar amount to residents of that state each year. (The annual threshold is normally $10,000 to $20,000, although it's only $5,000 in Rhode Island.)

The theory is that affiliates of e-commerce platforms are "agents" of the platform and are therefore subject to state "nexus" laws taxing out-of-state companies that operate through in-state employees or other agents. Pretty creative, no?

The reaction to these laws has been straightforward -- Amazon, Overstock and other effected retailers (eBay sellers are not considered affiliates of eBay, so the tax isn't a concern for them) have simply terminated their affiliates in Amazon-tax states rather than comply.

Earlier this year, California attempted to join the fray, imposing a $500,000 threshold on sales by California-based Amazon affiliates, but Amazon fought back. The company spent more than $5 million to launch a public referendum to stop California's Amazon tax law and ban collection of sales tax on online sales in California. Rather than face a law banning taxes on Internet sales, California negotiated a settlement with Amazon which was signed into law last week.

Under the terms of the settlement:

- Amazon will drop its referendum challenge;

- California will defer enforcing its "Amazon tax" until September 15, 2012, and even then will enforce it only for Amazon affiliates who sell more than $1 million to California residents;

- Amazon has pledged to create at least 10,000 full-time jobs and hire 25,000 seasonal employees in California by the end of 2015;

- Amazon will reinstate its California affiliates, estimated to number between 10,000 and 20,000; and

- California will forego any sales tax owed by Amazon affiliates for the period since the original Amazon tax law was passed.

So far, pretty uncontroversial.


Cliff Ennico

Cliff Ennico's "Succeeding in Your Business" column offers straightforward small business advice and tips

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