Hundreds of millions of dollars of consumer goods are shipped directly to consumers in every state by e-tail giants such as Amazon and Overstock. Cash-strapped states looking to get in on the action are devising legislative tax policies forcing online retailers to pay state sales tax on goods sold in their particular states. This has finance executives at these companies nervous, as they start to calculate the cost of compliance. Tax is usually a tricky topic, and state tax policies regarding online commerce are proving to be an extreme case of tax complexity. Retailers have been looking to Washington for a comprehensive, consolidated federal tax policy to escape the intricacies of a state by state tax system. In typical fashion however, Washington legislators don’t seem to be making any real progress to a one-policy-fits-all federal tax for online sales.
Current federal law requires retailers to collect sales tax only in states where a physical presence is established. Many states don’t consider this policy to be comprehensive enough; consequently, more than twenty states have passed laws expanding the definition of physical presence and thereby collecting more tax. New York was the first state to pass such a law, and both Amazon and Overstock challenged the constitutionality of New York’s legislation in court– to no avail. The recent boom in online commerce has dried the flow of sales tax for many states, and they are not likely to cease in seeking a portion of the revenue. Until a simplification of the tax policies happens, online retail giants will be forced to navigate the complexities of the tax situation on a state by state basis, significantly increasing legal and compliance costs.