Online Sales Taxes Update
Yesterday, I wrote a long post about the issue of online sales taxes. I won't recap it - you can just scroll down or click here to read it. Today's Tennessean has another story on the same subject that is worth commenting on. The paper reports that an Illinois law firm is suing several online retailers to force them to pay Tennessee sales taxes, claiming they have sufficient physical "nexus" with the state of Tennessee to be required to collect such taxes.

Why is an Illinois firm suing on behalf of Tennessee? Money.

Tennessee has a law, the False Claims Act, which allows individuals to bring suits on behalf of the state. Under Tennessee law, the plaintiff can receive as much as one-third of any money awarded to the state as a result of the so-called whistleblower suit. So the Illinois law firm sees the lawsuit as a way to generate money for itself.

The suits target some of the biggest names in the retail industry, including Wal-Mart, Target, Amazon.com, PETsMART, Media Play and Bass Pro Shops. More than 30 retailers in all are named as defendants in the cases, which were filed in Davidson County Chancery Court at various times during the past six months. Though differing in some details, the suits generally accuse the retailers of failing to collect and remit taxes on purchases made by Tennessee residents via web sites. The suits seek unspecified back taxes owed and additional monetary damages. Listed as the plaintiff in each case is the Chicago-based law firm Beeler, Schad & Diamond. The firm has launched a similar effort against retailers in its home state of Illinois.

But unlike Illinois, where state officials are supporting the suits, officials with Tennessee's attorney general's office say they plan to soon file motions to have the Davidson County cases dismissed. "We don't think it properly falls under the False Claims Act," said Larry Lewis, deputy in charge of the attorney general office's tax division.

The suits should be dismissed, for that reason alone. Still, the issue they raise is interesting. The lawsuits allege the online retailers have sufficient physical presence in Tennessee and are required to collect sales taxes for Tennessee. Under the Supreme Court's 1992 Quill decision, merchants that sell to a customer in a state where the merchant have no physical presence can not be forced to collect that state's sales taxes. If you purchase from a catalog or Internet seller in another state you do not owe the state sales tax if the seller has no physical presence in Tennessee.

Amazon has no physical stores or other operations in Tennessee, but the Illinois law firm claims the online seller of books and other merchandise still has sufficient physical presence in Tennessee and ought to be collecting Tennessee sales tax.

In the case of Amazon.com, Beeler, Schab & Diamond's suit alleges that the online retail giant's web site sells products marketed by three companies - bookseller Borders, Toys R Us and Target - which all have a physical store presence in Tennessee. In addition the suit points out that both Amazon.com and Borders get their book orders filled by Ingram Book Group, the La Vergne-based distributor. "Because Amazon has representatives operating within Tennessee under Amazon's authority, Amazon is a dealer engaged in the business of selling tangible personal property in Tennessee and has a duty to collect and remit use tax on all of its web site sales to Tennessee purchasers," the complaint alleges.

I'm not totally comfortable with the entire argument, but it is true that some "pure-play" online merchants have played a game to avoid collecting online sales taxes even in states where it appears the company has a physical operation of some sort. Wal-Mart Stores, for example, clearly has a physical presence in Tennessee with stores dotting the landscape, but until recently its Walmart.com online store did not collect sales taxes from Tennessee residents. How could it legally avoid collecting the tax? Walmart.com was established as a separate business unit, and the online store had no physical presence in Tennessee.

In other words, the company legally avoided collecting sales taxes (and Tennessee customers who patronized the online store did not owe the sales taxes) via a loophole in the tax code.

I've said before on this site (I think, but I can't find it in the archives - it might have been in a newspaper column) that the way to address online sales taxes is to define in the law that if any portion of a large multi-subsidiary corporation has a physical presence in the state, the entire corporation is deemed to have a physical presence in the state for the purposes of deciding whether sales taxes should be collected. Under that definition, Walmart.com would be required to collect Tennessee sales taxes because it is part of a larger company that does have a physical presence in Tennessee. But Amazon, which does not, would not. But Target, Toys R Us and Borders merchandise sold through Amazon.com to Tennesseans would, since Amazon is merely the broker in that transaction, and the sellers - Target, Toys R Us and Borders - do have a physical presence here.

Walmart.com, by the way, is starting to charge Tennessee sales taxes under an agreement it and seven other online retailers, including Target.com, made with several states. The agreement allows the companies to avoid state efforts to collect past taxes, and also benefits the retailers by allowing them to bring their online and offline operations into closer coordination. As anyone who follows the development of ecommerce on a daily basis knows, big-name retailers like Walmart, Target and others are wanting to be able to do such things as accept returns at their stores of goods bought online. The legal fiction that allowed them to claim Walmart.com was a separate business - and thus avoid collecting sales taxes - made such integration and coordination problematic from a legal standpoint.

By the way - just a reminder: Tennessee officials who talk about "lost revenue" from untaxed online sales are using long-ago discredited wildly-exaggerated estimates of those losses.