Could newsletter orders be subject to salesluse tax?

Most newsletter publishers probably haven't been paying a great deal of attention to the question of sales tax liability for orders received online, even though all reports indicate a steadily increasing number of newsletter publishers' web sites that can accept orders online.

Perhaps you should pay more attention. The present moratorium on sales tax on online sales is scheduled to expire on October 21 of this year. The Direct Marketing Association is leading the effort to gain an extension of this moratorium and is strongly urging that no congressional action be taken until or unless some means is found to simplify the present system of 7,600 state and local sales tax jurisdictions nationwide.

Why is this important?

Because if the moratorium is lifted and Publisher A in Alexandria, Virginia, is required to collect California sales tax on online orders received at his web site from customers in San Francisco, how long can it be that, as at present, orders received by mail or telephone continue to be exempt from those taxes if the publisher has no physical presence (nexus)?

Do newsletters collect sales tax now? Some do. Many don't. In five states there is no sales tax, and in the other 45 states publications are exempt in some states but not others. In still others, some types of publications are exempt from sales tax requirements and some other types are not. (Plus, in a couple of states, those discriminatory regulations have been successfully challenged in court.) In any event, at present, publishers in states taxing publication sales (Maryland, for example) are only required to collect tax on orders received from residents of the same state.

While I was at the newsletter association we attempted to serve as a clearinghouse for information in this area. It was not easy. My favorite was Ohio, where the state bureaucrat's answer to our question was, "It depends."

"On what?" we asked.

"On what we decide when we look over an issue."

(And all of the above doesn't even deal with the question of tax on sales of special reports and books, which are usually taxable even in states where newsletters may be exempt.)

Will we see order forms with copy like, "Order via our web site at Widgetfortnightly.com and save sales tax"?

Analysis and prediction

In the short term (this year), the moratorium will probably be extended. There doesn't appear to be any consensus on how sales tax would be applied online, and, importantly, not subjecting worldwideweb business to sales tax seems to fit the agenda of the "no new taxes" people in Congress.

And, as it happens, one of the leaders of that faction, Rep. Bob Barr (R-GA), is chairman of the House Judiciary Committee Subcommittee on Commercial and Administrative Law, which has oversight on the question.

In the longer term, I'm not so sure. The DMA and other sales tax opponents appear to be hanging their arguments on the factor of "complying with 7,600 different jurisdictions is impossibly complicated for smaller online merchants."

First, the Internal Revenue Code appears to be irrefutable evidence that Congress isn't deterred by arguments that something is too complicated for people to understand.

Second, if Land's End has a program which can immediately reflect that in New York State sales of clothing priced under $110 are exempt from the state sales tax but may or may not be subject to county add-on taxes, Congress may well assume any other merchant can do so as well--including the added complication of actually sending the collected tax to the appropriate state, county or some other taxing entity.

Why not? I've never understood why the whole problem couldn't be simplified by assuming that direct marketing transactions take place at the location of the seller, not the buyer.

Our small publisher in Alexandria, Virginia, may not have any way of knowing whether the order received from northern California comes from one of three counties that participate in the one-half percent add-on tax supporting the Bay Area Rapid Transit system, but he certainly knows what the Virginia tax is and could simply print it on order forms and renewal notices.

Editor's Note

On the NEPA marketing listserv this week, Mike Quinlan of the Boston-based Quinlan Publishing Group asked the following question: "We are looking into selling CDs and training tapes to customers in other states. Has anyone had any state sales tax issues come up when doing so (i.e., does selling CDs and/or tapes by mail establish a presence)?"

Lee McFadden of OneOnOne Computer Training, Addison, Illinois, gave this answer:

"There should be no sales tax problem selling CDs and tapes into other states by mail, any more than there is for selling newsletter subscriptions. We occasionally hear from aggressive tax authorities who think otherwise, like those in California and Minnesota, but we just write 'no nexus' across their communications, and that's the last we hear from them.

"If we sell from our booth at a trade show in, say, Massachusetts, we have to register and remit taxes for the sales made at that location. But that's about it.

"In Illinois, we are required to pay 'use taxes' directly to our state for anything we buy from out of state (whether by mail order, internet or sneaking across the border), but few people know that, and even fewer do it. It's a law known primarily to state tax auditors for whom it provides continuous employment."