Virginia Business Law Blog

Virginia residents are required under the Virginia tax code to pay a consumer’s use tax. This means that residents are to keep records of all purchases on which they did not pay the Virginia sales tax — for instance, for on-line purchases, purchases from mail-order catalogues or TV home shopping channels, and purchases from interstate outlets — and to pay the 5% sales tax themselves on their annual returns.

Of course, there are obvious issues of compliance with the consumer’s use tax, and in practice it is difficult to enforce on and collect the taxes generated by online sales. In order to combat this, earlier last week the Virginia State Senate approved the “Amazon Tax,” which would require internet retailers to collect the sales tax on purchases made from within Virginia themselves, and then pass the sales tax on to the Commonwealth.

The primary intended target of the bill are on-line retailers such as Amazon. The bill, SB 660, is touted to fix a ‘loop-hole’ in the Virginia tax system, whereby large e-tailers, like Amazon or Overstock.com, who have no physical presence within the state and thus do not meet the nexus requirements of Virginia Code Section 58.1-612, are not required to register to collect sales taxes.

However, large online retailers conduct a fair percentage of their sales through “affiliates,” smaller organizations and businesses who refer customers to the retail companies, and these affiliates in turn get a sales commission for their referrals of generally around 10-15%. SB 660 would alter the nexus requirements so that the presence of in-state affiliates would make a company like Amazon a dealer for purposes of Virginia tax law:

Dealer registration for sales and use taxes; sufficient contact. Provides that a dealer is presumed to be soliciting or transacting business in Virginia by an independent contractor, agent, or other representative if the dealer enters into an agreement with a resident of Virginia under which the resident, for a commission or other consideration, refers potential customers to the dealer if the cumulative gross receipts from sales by the dealer to purchasers in Virginia who are referred to the dealer by all residents with this type of agreement with the dealer are in excess of $10,000 during the preceding four quarterly periods. Such dealer presumed to be soliciting or transacting business in Virginia would be required to register for retail sales and use tax purposes.

Today, the bill failed to clear the House of Delegates Finance subcommittee, and is now dead in the water. Those in favor of the bill have argued that passing the bill is a matter of “fairness,” in order to level the playing field between “online giants” and “mom-and-pop brick-and-mortar” operations. In practice, however, when Amazon Tax Bills have been passed in other states, online retailers have reacted by simply dropping all of their in-state affiliates, causing the “mom-and-pop” online retailers to be devastated while the online retailer giants simply carry on as before. This has occurred previously in both North Carolina and Rhode Island, where Amazon dropped all of its local affiliates after those states passed their own versions of the Amazon Tax Bill. Because of this, the Finance subcommittee did not approve the Virginia bill’s passage:

The prospect of losing small local businesses that earn money from their own Web pages, much of it through links to Internet giants like Amazon.com, led the House Finance subcommittee to reject arguments from several traditional retailers[.]

Although SB 660′s supporters acknowledge the bill’s failure to achieve desired results in other states, Virginia legislators have claimed that the problem is not with the bill itself, but rather with the “integrity” of large online retailers:

Despite the enthusiastic tone of the assembled retailers, similar online sales tax bills in other states have failed to deliver on promised revenue. Amazon and Overstock simply end their relationships with affiliate advertisers in the state and head elsewhere, avoiding the sales tax, but still remaining a competitor.

“If they decide to leave and not respect fairness and integrity in business, then they’re not the types of businesses we want in Virginia anyway,” said [Republican Virginia State Senator] Hanger.

State Senator Hanger vows to re-introduce the bill next year.