On June 12, 2013, Gov. Terry Branstad signed House File 625, which amends sales and use tax laws in Iowa to expand the laws to catch more online-only companies. Iowa joins many other states who have specified nexus rules to prevent e-commerce companies from having an advantage over brick-and-mortar stores. Iowa, unlike other states, did not enact specific affiliate advertising stipulations for the creation of nexus but their law, like many others, doesn’t do a whole lot for the state. Why? Out of all the mega online retailers, few of them have nexus ties with Iowa or any of the other states that have enacted these laws. Instead, they position their distribution houses in states where there aren’t laws like Iowa’s new “e-fairness” law or where they can hire a subsidiary or contractor to pack and ship their orders.
It’s a complex web of sales tax avoidance and big online retailers will be able to sit out the storm in a state where sales tax isn’t a problem. After all, not every state has a sales tax. Some states, like New Hampshire, don’t charge sales tax on goods but charge tax on things like meals in restaurants or lodging, hoping to capture more dollars from tourism. If no Federal laws are made to force e-commerce sites to collect sales tax, these states might eventually become sales tax havens for large e-tailers. As more and more states close loopholes for online-only sellers, retail giants may simply move. Income taxes have caused corporations to take their businesses offshore. For example, a corporation can set up a company in Puerto Rico and sell its products to that company at wholesale prices.
The Puerto Rico-based company can sell the products profitably to the mainland — and those profits will be taxed at 1.3%, not the 35% they’d see on the mainland. A sales tax haven could offer the same benefits to e-tailers. Large e-tailers bringing jobs and business spending to the state could make an attractive reason to hold off on changing sales tax laws for a state like New Hampshire, and small e-tailers could set up distribution centers in sales tax haven states and get the savings. If more states enact sales tax laws for internet-only businesses, though, e-tailers could find themselves having to up sticks and move repeatedly, chased around the country by changing laws. It might be better to go ahead and invest in “FileLINK” a good sales tax software package to make the process of collecting and filing taxes more manageable.