Nearly all states that are experiencing recession-generated revenue shortfalls are looking to sales and use taxes to help close the gap.

As such, a number of states have enacted "Amazon" laws to require out-of-state and Internet vendors who sell through in-state affiliates to collect and hand over sales taxes on items they sell to state residents. Other states have signed on to the Streamlined Sales and Use Tax Agreement to simplify the system and pressure Congress to pass federal legislation that authorizes collection authority.

"It's the end of the fiscal year, and states and local governments are having a rough time in their budgets," observed Charles Collins, vice president for government affairs at payroll giant ADP. "The National Conference of State Legislators estimates an $86 billion shortfall, so obviously it's a pretty big challenge for state legislators to either make budget cuts or come up with revenue enhancements."

Meanwhile, the volume of tax changes is expanding, audits are getting tighter, and the definition of "nexus" (the constitutionally required relationship between an out-of-state business and a state allowing the state to tax the business on its activities) and of what is taxable is getting stricter.

The concept of nexus is based on two clauses in the Constitution: the Commerce Clause, which prohibits states from unduly burdening interstate commerce, and the Due Process Clause, which requires a minimum connection between a state and an entity it wishes to tax.

"There are a large number of state legislators who took office at the beginning of the year, and there are a number of new governors as well," said Collins. "What's unique is that most of them ran on a no-tax-hike platform that's making for an interesting dynamic in the legislatures. Although a lot of bills are being introduced to raise taxes, there's also a lot of resistance to raising taxes. So there is more focus on budget cutting and a review of existing exemptions."

"There is especially an increased focus on compliance, with the focus on collecting as much revenue as they can within existing laws," he said. And part of this is getting more remote vendors to collect sales tax."

Moreover, states are searching for ways to broaden the tax base, Collins explained. "Because of the pressure not to increase rates, they want to expand the items subject to tax," he said. "For example, Nevada has introduced legislation that would expand the sales tax to services. North Carolina has looked at that also."

Some states, such as South Dakota, tax most services. "Repair labor, maintenance agreements, security monitoring and haircuts are not taxable in most states. That's an area that will see a lot of attention in the future," Collins added.

Wayne Berkowitz, head of the state and local tax group at Berdon, agreed that the states are becoming more aggressive at defining what items are taxable. "This is especially true with computer software and information services," he noted.

"For example, if you buy Microsoft Word, it's subject to sales tax. But if you buy software through the cloud, is it taxable? New York now says that if the billing address for the service is in New York, it is subject to tax. They say that if you have control over that software, it is just like you purchased the software, so it's subject to sales tax."



Click-through nexus, legislated by Amazon-style laws, is part of the process as states seek additional revenue. The Amazon laws are attempts to collect sales tax from Internet vendors such as Amazon and that sell through in-state affiliates' links to their Web sites. The Internet vendor pays a commission to the affiliate when the customer they refer makes a purchase from the online seller.

"New York enacted the first Amazon law in 2008," said Steven Roll, BNA's assistant managing editor for state tax. "This was followed by North Carolina and Rhode Island in 2009. In 2010, no additional states enacted Amazon laws, but in 2011, we've seen Arkansas, Connecticut, Illinois, Vermont and California enact similar provisions. Last year, it looked like most states would follow the Colorado route [which passed legislation requiring out-of-state vendors to notify the state when a sale was made to a state resident, and to send a letter to resident-purchasers notifying them of their obligation to pay use tax]. But retailers' associations have been pushing the Main Street Fairness Act as a federal solution to the states' problem."

The Main Street Fairness Act grants congressional consent to the SSUTA, the multi-state agreement on sales and use tax collection and administration that was adopted in 2002. It authorizes each member state to require remote sellers to collect and remit sales and use taxes on remote sales. One of the impasses to joining the SSUTA for many states is the adoption of uniform sourcing rules, according to Roll.

"Although eight states have enacted Amazon laws, in our recent survey of state tax departments 20 states said they would find nexus in Amazon situations even without enacting Amazon legislation. They believe the authority is already incorporated into their tax code."

In fact, Connecticut Commissioner of Revenue Services Kevin Sullivan stated, "Amazon, Overstock and others have had more than enough business presence in Connecticut before the new remote-sellers legislation passed this session. And they were also clearly doing business with sufficient state nexus on and after the effective date of the new state law."

"Instead of making a simple and inexpensive adjustment in their automated billing processes, Amazon and the others will do anything to keep competing unfairly and pass tax obligations along to unsuspecting state residents who then have to remit the resulting use tax," Sullivan said.

With California joining New York and Illinois, the action may shift to the courts, according to Dan Schibley, senior state tax analyst at CCH. "The only other state currently with click-through legislation on its agenda is Massachusetts," he said.

But he indicated that the end result hoped for by state lawmakers has not happened. "The result is mainly that the affiliate programs are being cancelled, not that out-of-state retailers are starting to collect. Under the streamlined initiative, they would get the federal authority they're seeking to force the out-of-state retailers to collect."

However, the larger states aren't interested in pursuing SST because they don't want to meet the streamlined specifications, despite the fact that pursuing Amazon legislation won't get them the revenue they want.

"These laws are being driven by a lot of Main Street retailers, who think they're losing sales to the remote sellers," said Schibley.

And, according to Amazon, the "Main Street retailers" are not the mom-and-pop shops that many associate with small-town America. It pointed out that California's Amazon legislation is "supported by big-box retailers, most of which are based outside California, that seek to harm the affiliate advertising programs of their competitors."



Both the frequency and the intensity of state sales tax audits are increasing, according to Susan Nunez, a principal with St. Louis-based CPA and business advisory firm Brown Smith Wallace.

"For example, state auditors are often going outside the statute of limitations period," she said. "If they ask you to sign a waiver for, say, a five-year look-back period, make sure you understand what you're signing first. Most taxpayers just go along with it, because they're faced with the threat of a jeopardy assessment if they don't sign. The auditor can threaten it for any period outside of the statute of limitations period."

Nunez advised caution in dealing with the time allowed to respond to the auditor. "Try not to be bullied into having to respond in a day. An audit should be conducted in a reasonable manner," she said. "Understand how the audit should be performed, and be aware of your rights."

Frequently, taxpayers will take the position on sales and use tax of the best practices in the industry, Nunez observed. "You should trust the position you are taking and even thought the auditor may sound knowledgeable, push back and make sure the auditor has support for his or her position. Don't just accept it as fact."

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