Internet Tax Looming in Indiana?

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Several months ago after speaking to my state representative, I wrote a post about Indiana and the Advertising Tax and the fact that affiliates in Indiana were safe for the time being because our legislature had repeatedly refused to enact an Internet tax and had actually made a deal with Amazon not to make them collect the taxes in exchange for Amazon building distribution centers here. A lot has changed very quickly in the last week.

The IBJ reported yesterday that Simpon Property Group filed suit against the Indiana Department of Revenue to force the state to begin collecting sales tax from Amazon. While I haven’t yet seen the suit, the article made it sound like the issue was mainly about the distribution centers but hinted a bit about an affiliate nexus. My fears were confirmed today when the IBJ reported that an Indiana state legislator is now filing a bill that will force Indiana to collect taxes from online retailers that “have a physical presence or affiliate distributors” in the the state. The exact “nexus” language is not there, but I don’t think it’s a stretch to say that this legislation in basically going to call for an affiliate tax.

This is a complex issue for many reasons. First of all, most people do not even understand why online retailers do not currently have to collect the tax for purchases made in the state if they do not have a physical presence here. The short answer is that in Bellas Hess v. Illionis and Quill Corp. v. North Dakota the Supreme Court held that it was unconstitutional. The second part of the equation is that most people do not understand the issue of affiliate marketing and how it relates to taxes.

As I posted in a comment on the IBJ site, here are the potential ramifications of Simon winning its lawsuit and/or the Indiana legislature passing an internet tax:

“We have two issues here. The first are the incentives given to Amazon to build their fulfillment centers here. Those included not collecting sales tax on the purchases made online. If we had not agreed to those incentives, the plants would not have been built here and we would not have gotten the jobs. It’s not illegal. It’s business. If the state all of a sudden decides to start collecting the taxes, Amazon will 1) pull the centers and take away the jobs, and 2) sue the state for breach of contract. At that point, we will lose the jobs and have to pay to defend the suit and STILL not be able to collect the sales taxes because there will be no local distribution centers to trigger the tax law. How does anyone in our state win in that situation? Sounds like we will only LOSE money. (Update: Amazon negotiated with the State of Indiana to start collecting the tax January of 2014. This helped Amazon protect its investment while at the same time will keep Amazon in the state. Unfortunately, our legislators now want to go back on the deal to push it 6 months earlier).

The second issue is the fact that Indiana does not force the merchant to collect taxes for online sales when the company is out of state. This is consistent with a Supreme Court decision that held that a state CANNOT tax an out-of-state merchant for in-state purchases unless that merchant has some kind of agent selling for them in that state. Simon wants to argue that because we have people in Indiana who own internet sites that post advertisements for those merchants that those sites become agents, establishing a “nexus” so that the state can tax those purchases. However, a few other states have tried it and it is failing miserably. The end result is always that those merchants just cut their ties with the internet advertisers. What does that mean? There is no longer a nexus and they don’t have to collect the taxes. Then add to that the fact that all of the internet companies have lost their contracts and you now have a lot more unemployed Hoosiers–something we definitely do not need. We actually saw other companies move from Illinois to Indiana (bringing more jobs here) in the last few months because Illinois passed an internet tax. Do we want to now lose those jobs, too? ”

Current Status

The Streamlined Sales Tax Governing Board (of which Sen. Luke Kenley of Noblesville is the President) has been meeting in D.C. this week to discuss a federal solution that would keep us from losing jobs in Indiana. In the meantime, Indiana legislators are going to push forward to enact a state solution that could be devastating to our economy due to the number of jobs that would be lost in Indiana.

We need to make sure that we do what we can to 1) educate ourselves, 2) educate all of the legislators, and 3) make sure that the public understands what really is at stake and what has happened in other states.

The Affiliate Summit Indianapolis Group will be meeting at the end of November and we encourage others in the industry to come meet with us and discuss the issue. In the meantime, I will continue posting updates as I get them about what is happening and what we can all be doing.