New Colorado tax on Internet sales sparks concern, confusion

A new Colorado law requires online retailers that do not have a physical presence in the state to collect sales tax on Internet purchases by Colorado residents. But, contrary to some reports, the law does not include an affiliate tax.
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SNEWS® received several emails and calls in the last week from people confused about the details of a new Colorado law that levies a tax on certain Internet sales based on news reports on the web.

On Feb. 24, Colorado Gov. Bill Ritter signed into law House Bill 1193, which includes what is commonly called an “Amazon tax.” The law requires online retailers that do not have a physical presence in Colorado to collect sales tax on Internet purchases by Colorado residents. Contrary to at least one report in the media, the law does not include a tax on Internet sales produced by “affiliates” that are based in Colorado. Affiliates are Internet marketers, bloggers and others online that drive business to other sellers, including out-of-state companies, and receive commissions for any sales resulting from the clicks coming from them.

So, why the confusion over the affiliate tax generated by incorrect web reports? Likely because of last-minute changes to the bill: Originally, House Bill 1193 did, in fact, include an affiliate tax, but the provision was stripped from the bill shortly before it was signed into law.

On Feb. 25, after Gov. Ritter signed the bill, the Outdoor Industry Association issued a trade alert that incorrectly stated the law did still include the affiliate tax. On Feb. 26 at 4:15 p.m., Alex Boian, director of trade policy for OIA, emailed media members asking them to hold any story on the Colorado law due to inaccuracies in the original trade alert. Apparently, some media members missed Boian’s message or failed to heed his request, and that led to inaccurate reports going live -- and, thus, the confused retailers and other industry professionals.

Still significant

Although it does not include the affiliate tax, the Colorado law is still significant due to the tax on Internet sales for companies that are not in the state. Such so-called Amazon tax laws have been hotly debated for years, and more states are adopting them to supplement their lean budgets and declining revenues, which could in part be blamed on more e-tail sales that don’t beef up local coffers. (Click here to read the Jan. 4, 2010, SNEWS story, “Internet sales tax debate flares up in Colorado -- are other states next?”) For example, Kansas, Kentucky, New York, North Dakota and Washington already tax Internet sales to out-of-state sellers, while Virginia, New Mexico and Oklahoma are considering similar measures. In February, the California State Senate passed an Amazon tax, and according to a Feb. 19, 2010, report in the Wall Street Journal, “It has been estimated that taxes paid by Amazon, Overstock.com and other online retailers would add $107 million annually to California’s budget.”

Certainly, online sales produce a big chunk of business for the outdoor and fitness markets, among others. In the outdoor industry alone, total Internet sales nationally for 2009 exceeded $1 billion, according to OIA. But it’s not clear to what degree the Amazon tax laws in various states will now affect the profits of Internet retailers.

In Colorado, a company is exempt from collecting the taxes on Internet sales by out-of-state companies if it made less than $100,000 in total gross sales in Colorado the prior year.

“While we do a fair amount of Internet sales, we don’t come close to $100,000 in just Colorado, so this would not affect us at all,” said Bob Lachniet, owner and president of Arizona-based Fitness4Home Superstore. “Most of our Internet sales go to the East and West coasts.”

However, Rock/Creek, an outdoor specialty store and online seller based in Chattanooga, Tenn., greatly exceeds the $100,000 threshold in Colorado, said Dawson Wheeler, Rock/Creek’s president and co-owner. “Depending on the time of year, it’s in our second biggest zone that we ship to, so it’s a very important piece of our business,” he said.

Wheeler said the sales tax could cut into Rock/Creek’s online profits, and it could increase operation costs, especially if more and more states enact their own Amazon tax. For one thing, Wheeler said he would have to invest more time and money into dealing with tax forms for multiple states.

“If this grows on a state-by-state basis, an online guy could be filling out, as time goes on, 50 sales tax forms at the end of the month,” said Wheeler. “Your accounting costs could go through the roof.”

Future impact?

Wheeler said the total impact on the specialty retail market would ultimately depend on how many other states adopt an Amazon tax.

“If you’re talking about dealing with one state, it’s not a problem,” Wheeler said. But he said he wondered whether there is a shift in the mindset of state legislators: Does the Colorado law signal a greater willingness to tax Internet sales, and could there be a domino effect, with state after state adopting an Amazon tax? “That could be a problem,” said Wheeler. “The question is whether we’re at a tipping point.”

Click here to read the entire Colorado bill that was signed into law.

--Marcus Woolf

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