Colorado and North Carolina are two of the four states that have enacted some form of Internet sales tax (New York and Rhode Island are the others). But these two states are on the leading edge of state attempts to tax the Internet.
Colorado’s eTax law went into effect on March 1st. It established sales tax nexus in the state through affiliates, just as the other 3 states had done previously. But Colorado then went a step further and created a reporting obligation. All internet retailers selling to Colorado residents are now supposed to collect data on those sales, provide the purchaser with written notice of their use tax obligation, and then provide the state Department of Revenue with a list of all CO-based purchasers once a year.
By enacting an information reporting requirement, rather than a tax collection requirement, CO neatly sidestepped current law (as set down by the Supreme Court) that exempts out-of-state companies from collecting sales tax. And, by demanding that list once a year, the Department of Revenue now has an easy way to cross-check who’s reporting use tax on their returns, and who isn’t.
North Carolina’s law went into effect in 2009. It was based on New York’s original legislation, that created nexus through affiliate relationships. It doesn’t have the same language that Colorado does. It also didn’t make the state any money. Internet retailers simply cut ties with affiliates in the state and continued business as usual.
Now the state is trying something new. They have demanded that Internet giant, Amazon.com, turn over all sales records involving North Carolina purchasers going back to 2003. That’s lead to a lawsuit, whereby Amazon is claiming breach of privacy. However, the state has also announced that retailers have until the fall of this year to voluntarily enter into an agreement with the state to charge and remit sales tax on behalf of NC residents, or face a demand for back-records, and have penalties and interest assessed for uncollected taxes.
Is it legal? No-one’s quite sure. The idea of forcing out-of-state retailers to collect taxes or face an audit of old records would seem to be a tough pill for a court to swallow. It also expressly contradicts the Supreme Court’s ruling on that issue. Plus there’s no language in NC’s eTax law to allow for this. It is, however, another warning shot for Internet retailers that states are not giving up on the idea of taxing Internet sales.
This is an area we are paying very close attention to at USTaxAid. That’s why we created the product State Nexus: The BIG Issue for Business Owners in 2010. You get an eBook explaining current developments, and an audio commentary expanding on those ideas. If you sell on the Internet, this is an issue you cannot afford to ignore.