Online Sales Tax Collection Forecast: Murky With A Chance of Fudgeballs

The state of California has agreed to a compromise deal with Amazon.com that postpones collection of sales taxes on sales to Amazon customers in California until late next year. In the interim, Amazon and a coalition of other etailers have until July 31, 2012, to lobby Congress to pass legislation authorizing states to collect sales taxes for online sales, regardless of nexus (and thus overturning the 1992 Quill Corp. vs. N. Dakota ruling of The Supreme Court that precluded taxation for sales made to a Ship-To address in a state where the merchant has no presence or "nexus."). If Congress does pass that legislation, the deal with Amazon is that it won't have to collect sales taxes for California shipments until January 2013. Otherwise, they will have to start paying the sales tax in September 2012.

This may also moot a series of political and court battles on this issue that have been pursued over the last few years in New York, Illinois, Connecticut, Rhode Island, North Carolina, Arkansas and Colorado.

Complicated enough? Well, it gets worse. Illinois recently passed an online sales tax law that sets the rate for the sales tax as the location in Illinois where the order is processed, not the delivery location. If the merchant has no nexus in Illinois at all, then the standard state tax rate of 6.25% is due, but within Illinois, there are different tax rates for each county and municipality. In fact, the rate is 0% in some locations: so obviously some large "processing center" is going to locate there and offer to do third-party processing for any out-of-state direct merchants who want to avoid Illinois sales tax. But more to the point, since it is difficult to determine where the processing location might be -- and impossible for the consumer, in most cases -- this seems like the most bizarre piece of tax legislation out there. Just for starters, the "processing center" could be the location of the server on which the order processing system is running, or the credit card processor handling the transaction, or the credit card issuer authorizing the transaction, and so on, with other possible links in the processing chain. And this doesn't even account for mirrored servers in multiple locations that are often necessary to guarantee up-time for the processing service.

This is sheer madness, whether it's California playing a calendar game, the merchants courting Congress for legislative favors, or Illinois pretending that there is a physical cash register somewhere ringing up online sales. And it seems like there is no obvious way to stop this insanity. So fasten your seat belts. We're all in for a very bumpy ride!