Michigan Sales Tax on Internet Retailers...Possibly
The applicability of sales tax in Internet transactions is a contentious issue in the state tax arena. Many Internet retailers do not collect sales tax on their sales unless they have a physical presence in a state. As a result, states have alleged that they are losing millions in tax dollars and brick-and-mortar retailers are operating at competitive disadvantages to their online competitors that do not impose sales tax. Although states have encountered Constitutional difficulties in taxing out-of-state retailers, the pendulum may be swinging in favor of the states.
By way of background, the taxation of out-of-state Internet retailers is governed by the U.S. Supreme Court's 1992 decision in Quill v. North Dakota. In Quill, the Supreme Court held that a state cannot require an out-of-state retailer to collect and remit sales tax unless the retailer has a "substantial nexus" with the state. A "substantial nexus," as a general matter, requires the retailer to have employees or offices in the state. Thus, Quill has historically thwarted the ability of states to mandate that out-of-state Internet retailers collect and remit sales tax.
However, Michigan has joined a growing group of states that are fighting back. The Michigan legislature has proposed a so-called "Amazon Law" that stretches the meaning of "substantial nexus" in order to require out-of-state Internet retailers to collect and remit sales tax. Specifically, House Bills 5004 and 5005 contain affiliate and click-through nexus provisions relating to the sales and use tax collection responsibility of out-of-state Internet retailers.
Under the affiliate provision, an out-of-state Internet retailer will be required to collect and remit sales tax if it has a relationship with certain defined persons. Under the click-through nexus provision, Michigan will require an out-of-state Internet retailer to collect and remit sales tax if it is siphoned customers via web-links from the websites of in-state affiliates.
The Michigan Legislature has not finalized House Bills 5004 and 5005 and there is proposed federal legislation that could alter the Internet sales tax landscape. So, stay tuned for updates in the near future on this issue.
Please contact me if you have questions regarding Internet sales taxes.
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