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Last week, Illinois Governor, Pat Quinn, signed state legislation requiring large Internet retailers to collect that state’s 6.25 per cent sales tax on all Illinois Internet shoppers. While Illinois brick-and-mortar stores cheered wildly at the newly leveled sales tax playing field, Internet retail giant picked up its ball and went home. Calling the law “unconstitutional and counterproductive,” Amazon said it plans to end relations with its Illinois affiliates by April sales tax

This bill is just the latest salvo in the ongoing battle waging between giant Internet retailers, state governments and brick-and-mortar retailers. It started in 1992, when the US Supreme Court ruled that only sellers with a “nexus” (i.e. a physical presence in a state in the form of retail outlets, warehouses, offices, transportation hubs, etc.) were required to collect that state’s sales taxes.

In 2008, the State of New York found a way around the 1992 ruling by claiming that in-state affiliates provide those out-of-state retailers with a physical presence. Affiliates are website owners and bloggers who post a retailer’s advertisement or links and receive a commission on any sales that result on the retailer’s site via clicks from the affiliate’s site. Dubbed the “Amazon Law”, it applies to retailers who receive a total of more than $10,000 in referrals within a 12-month period from New York affiliates.

Amazon immediately challenged the law in court, where it still remains today. As other states started enacting their own versions of “Amazon Law”, Amazon has responded similarly by closing warehouses and terminating affiliate relationships.

What does this all mean for small and mid-sized e-commerce sites? In many ways, not much. Most of the state laws being enacted or proposed are targeted at large retailers. Transaction thresholds used to decide who does and does not have a sales tax collection responsibility have been for the most part set high enough to exclude many small to mid-sized businesses.

The other businesses being impacted by these laws are the affiliates of retailers like Amazon and, many of whom are retailers themselves and may be selling their products on these sites. A small but very vocal group of Vermont bloggers and in-state retailers affiliated with Internet sellers are organizing a counter campaign to fight that state’s proposed Amazon law. Some of these small businesses would stand to lose substantial income generated by their affiliate programs with major retailers.

The biggest danger for small businesses is if the tax collection responsibility rolls down to smaller players. Though the technology needed toonline retailers calculate and charge the appropriate sales tax amount at the time of the purchase is relatively easy to implement, the reporting and payment of those taxes to thousands of state, county and municipal tax departments would be disastrously onerous for many companies.

One path out of the sales tax quagmire may be the Federal government stepping in to establish a single remote Internet retailer sales tax. Unfortunately, the US Congress tabled the national Streamlined Sales and Use Tax Agreement last year and shows no signs of passing it anytime in the near future.

Until that time, small and mid-sized businesses would do well to keep informed on the sales tax landscape and, use the services of an e-commerce savvy CPA or market-aware web professional.

What are your thoughts on the Streamlined Sales and Use Tax Agreement? Good idea or not?

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