Tuesday, March 22, 2011

Since When is Our Dining Room Table a Nexus?

Nexus—a level of commercial activity within a legal jurisdiction that is sufficient to require a business to meet the jurisdiction’s tax regulations, including the collection and remittance of a sales tax.
The American Heritage Dictionary of Business Terms.

It’s all my wife’s fault. She created a website for heart shaped rings (www.heart-rings.net). That site provides photos and descriptions of heart-shaped rings from sellers such as Amazon and Kohls and Target and others.

Shoppers do web searches and come across her site. If they click on one of her listings they get taken to the site where the item is actually for sale. If they purchase the item Carolyn gets a “commission”. Not bad. She’s got hundreds of hours invested in creating the site. She makes a little bit from sales.

The State of California wants to declare our dining room table a “nexus” or a place of business. That’s where my wife’s laptop sits and where she does her work—except for when she moves her laptop over to the couch to work on the computer and get her daily “Criminal Minds” or “Lenny” fix. What California is trying to do is come up with a way to require online retailers like Amazon and Overstock to collect sales tax on its sales. And they’re using Carolyn to try to do it. Good luck.

Amazon says that if California does that then they will terminate their arrangement with all “affiliates” in California.

Oops, a tug of war between Amazon and California centered over the activities that go on at our dining room table.

Now I know that the state of California is just about broke and is doing everything and anything it can to scare up a few billion bucks. But this is ridiculous. Right now Carolyn is putzing around on her computer 5 feet away from me at the other end of the dining room table, hair pulled back, in a blue bath robe and pajamas, reading glasses halfway down her nose. Yep, she’s a retail dynamo. And by the way, the few hundred dollars she’ll make this year from her site will be duly reported on our income taxes.

That’s how ridiculous this is. Amazon has already terminated affiliates in a few states which have declared affiliates to constitute a “nexus” in order to require sales tax collection. California’s legislation will be moot about 5 minutes after Gov. Brown would sign the bill. That’s how long it’ll take Amazon to terminate affiliates and negate any tax benefit California would derive.

Now I can’t fault the state of California or any other state from wanting to see sales taxes collected and remitted. If a product is being purchased online and used at the point of delivery then sales taxes should be paid. If there’s any real greed or tax avoidance going on here it’s on the part of Amazon and Overstock and other online only retailers. My problem comes in the manner in which California and other states are attempting to define as a nexus.

The world of business has changed markedly in the last decade. There is now a tremendous volume of retail activity on the internet. There needs to be a different and better definition. The old definition of “nexus” is at best obsolete in online retail buying and selling. State government efforts which would define our dining room table as a nexus are legislative legerdemain and throw the proverbial baby out with the bathwater. It’s also harder to define what constitutes “interstate commerce” as subject to regulation by the federal government.

How about this then? Rather than the tenuous nexus of our dining room table that California would like to see, how about approaching it on a federal level. It doesn’t matter where a seller of goods on the internet has an actual location. Amazon has no retail locations (unlike WalMart or Target or thousands of other retailers who also engage in internet sales and collect sales taxes). Amazon by its very nature is an online enterprise.

What that means is that the “nexus” for Amazon starts with a buyer accessing Amazon.com through whatever portal, affiliate or search engine that person is using. That is the point of sale. It proceeds to the placing of an order and ends when the merchandise is received by the buyer. As far as I’m concerned, that is the nexus and the point of sale is essentially the address to which the product is going to be delivered. That is the presumed point of use. Amazon should collect the appropriate sales tax on that transaction and then remit it to the appropriate state.

The remedy is Federal not state. It concerns the interstate commerce provisions in Article I Sec. 8 of the U.S. Constitution. Let’s acknowledge that this is an issue never envisioned by the framers of the Constitution and regulate it properly.

Interestingly, Amazon claims that this is an onerous burden fraught with complexities between the various taxing bodies (i.e. states). Isn’t that amazing for a company which employs hundreds, if not thousands of programmers. In fact, an article on a website called “The New Rules Project” entitled “Internet Sales Tax Fairness” had the following comment:

“Today, software has largely eliminated the difficulty of calculating and remitting sales taxes for the country's many state and local jurisdictions. Indeed, Amazon.com, which opposes extending sales tax to online retailers on the grounds that it would be "horrendously complicated," collects sales taxes nationwide for Target as part of its management of the chain's online business.”

Come on Amazon, get real. Come on California, get real and stay out of my dining room. My wife isn’t a nexus and neither are the 10,000 other Amazon affiliates in California. We’re just going to be the losers in the state’s tug-of-war over sales taxes.


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