Sales and Use Tax, Income Tax

By Jason Watson, CPA
Posted Monday, October 18, 2021

There are two issues at play, and they are not necessarily connected. First is sales and use tax which frankly receives the most attention because of online retailers. Some theory first. When you purchase a computer at your local Best Buy, the seller is collecting sales tax in a fiduciary role. In other words, it is collecting your sales tax obligation for you on your behalf, and remitting it to the authorities. Nice of them, right?

If you buy this same computer from an Amazon retailer, the seller might or might not collect sales tax on your behalf. If the retailer does not collect sales tax, it is still your responsibility to pay this sales tax along with your state income tax return. No one does this of course. We have asked 25,000 times in the past decade, and we have never heard a Yes from a client. But understand that you are required to pay sales tax if not collected by the online seller.

States are getting tired of the under-reported sales tax obligations. Therefore several are going after businesses with strong internet presence. Here is a summary about New York’s “Amazon Law” from Cbiz.com (Corrente, 2011, yeah a bit outdated but provides context)-

In practice, such an online selling scheme may work as follows. A retailer selling neckties has a shop in Florida, and it wants to increase sales by selling over the internet. The retailer sets up a website, and decides that to generate traffic on its website, it will partner with other online websites. In this example, the retailer places an ad on the website of the New York Times. When a customer reaches the retailer’s website by clicking on the link at newyorktimes.com, the “click-thru” is logged. If the retailer makes a subsequent sale as a result of the click-thru, the New York Times is paid a commission. As a result of the Amazon law, New York assumes that the relationship has created nexus for the online retailer.

According to Avalara.com (one of the first experts in sales tax nexus), Amazon does not have fulfillment centers in New York. As of 2016, they further listed about 25 states with similar click-through nexus legislation or policies.

The other issue is income tax. Just because a retailer has an obligation to collect sales tax does not necessarily mean they have an instant income tax obligation. Some states have a fruit of the poisonous tree mentality where sales tax nexus creates an income tax nexus and vice versa. Don’t forget that states cannot impose an income tax per se, but they can impose a business tax or a franchise tax or a whatever tax that smells, walks and talks like an income tax but isn’t call an income tax.

Remember too that Public Law 86-272 protects TPP only from a strict income tax. However states are the using the same “non-income tax” tax as a work around for everything from tangible personal property to services.