This article was also published in Law360 on January 16, 2014, and Exempt Organizations Tax Journal on January 23, 2014.
The U.S. Supreme Court has recently refused to intervene in the long-running skirmish over whether a state can compel online retailers to collect sales tax. The decision serves as a reminder that many states continue to aggressively pursue out-of-state online retailers to collect and remit sales tax for all sales made into the state. This reminder is not just for for-profit entities, but needs to be heeded equally by charities, trade and professional associations, and other nonprofit organizations that sell taxable goods and services online into remote states where they are not currently collecting and remitting such taxes.
The basic rule of vendor sales tax responsibility is that states can only require a remote vendor to collect and remit sales tax for sales made to residents of states in which the vendor has a "physical presence." Physical presence results from having facilities (offices, stores, etc.) or employees or agents within a state. However, as sales via the Internet have grown in volume, states have sought to find ways to stretch the physical presence requirement to reach online vendors with more limited connections to the state.
New York's "Click-Through" Nexus Law
In 2008, New York enacted a statutory presumption that a remote seller had a sufficient presence in New York for sales tax purposes if the seller contracted with an in-state person to refer potential customers by means of a website link or otherwise in exchange for a commission or other consideration. Vendors affected by the law sought to have it overturned in the courts, but the New York Court of Appeals upheld the law in March. The decision of the U.S. Supreme Court declining to hear the case marks the end of efforts to overturn the New York law and thus leaves the statutory presumption in place. Several other states have already enacted (or are considering enacting) similar laws.
Nonprofit Organizations Not Exempted
While organizations that have qualified for exemption from federal income tax may also enjoy exemption from state income tax, the benefits of nonprofit and federal tax-exempt status generally are more limited in the sales and use tax context. Rules vary from state to state as to what, if any, exemptions from sales tax may apply to nonprofit organizations when they purchase otherwise taxable goods and services for use in fulfillment of the organization's exempt purposes. But typically nonprofit organizations are not exempted from the obligation to collect and remit sales tax on sales of taxable goods and services if they have sufficient connections with a particular state as to subject the organization to its taxing jurisdiction.
Possible Federal Legislation
The U.S. Congress has the ability to alter the "physical presence" standard. Now that the U.S. Supreme Court has declined to review that standard, the focus shifts to whether Congress is willing to do so. The proposed "Marketplace Fairness Act" legislation would do so by providing that a state meeting several simplification standards can compel online retailers to collect sales tax for sales into the state regardless of the retailer's lack of physical presence in the state. In its current version, the Act would exempt retailers having annual sales of less than $1 million. That Act has passed the Senate and awaits action in the House of Representatives.
Risks v. Benefits
Collecting and remitting sales tax can be a hassle. Sales tax laws, including rates, exemptions, and filing procedures, vary among the jurisdictions. And numerous local jurisdictions impose sales tax in addition to the state's. On the other hand, failure to collect and remit sales tax when required potentially leaves a vendor liable for past years' unpaid taxes, together with interest and penalties, without restriction by a statute of limitations. And the ability to recoup these taxes after-the-fact from the buyers who would have borne them is seldom possible as a practical matter once the initial sales transaction has closed. As a result, a careful review is merited by an online vendor for each state into which it sells taxable goods or services as to whether that state's nexus standards for sales tax purposes could subject the vendor to the state's taxing jurisdiction.
Many nonprofit organizations have seen their Internet presence evolve over time from a mere information site to a website that serves as an online store for the organization with sales being made to any state in which a customer happens to be located. The winding up of the New York "click-through" nexus litigation serves to remind all online retailers, including nonprofit organizations, of the need to carefully review the sales and use tax laws of each state into which they sell taxable goods and services to determine if they have liability to collect and remit such tax. The risk of being caught with a state's claim for past due sales tax remittances can easily grow to amounts that exceed the costs involved in assuring proper tax compliance.