In recent years, the big sales tax topic has been the emergence of the so-called "Amazon" laws, whereby an out-of-state Internet retailer who has a "click-through" arrangement with a local vendor must collect sales tax in that state, even if it has no physical presence there.
New York was the first state to enact such legislation, and currently about a third of all states have similar statutes. Prior to these laws, states primarily imposed tax on vendors with a physical in-state presence. As a result, Internet and catalog orders of tangible personal property were often exempt from sales tax. Only when Amazon.com and others grew into some of the nation’s largest retailers did states finally realize they were losing billions in tax revenues.
The "Amazon" laws highlight the states’ problem in dealing with new business models. The issue of taxing Internet transactions is based on state legislatures’ unfamiliarity with innovative online businesses, as well as trying to stretch old regulations to cover previously unimagined services. Simply put, states and their tax laws are in a constant struggle just to keep up.
The new frontier in the world of sales tax is the "sharing economy," exemplified by companies such as Airbnb and FlipKey. As the argument goes, why should a short-term apartment rental through Airbnb not be subject to sales tax, when a similar stay at a Holiday Inn is taxable? The same holds true for companies like Uber and Lyft, which compete with local car services that are required to charge sales tax. The states’ revenue stakes from these services are extremely high. According to one estimate, in 2013 business and leisure travelers spent over $880 billion, more than half of which was spent on lodging and transportation. The sales tax implication on this alone is in the billions of dollars.
Much like with Amazon.com, New York regulators have taken the lead in pursuing these businesses, starting with Airbnb. New York State Attorney General Eric Schneiderman recently ordered Airbnb to turn over its records so the state could determine whether New York rental property owners have been collecting and paying the appropriate state taxes, including sales and income taxes. An intense legal battle ensued, resulting in a one-year truce between the parties. In the interim, Airbnb agreed to provide New York with information regarding its hosts in New York City, but will redact the names and other personally identifiable information.
Other jurisdictions are joining the Airbnb fray, notably Portland, Oregon and San Francisco, California. In San Francisco, Airbnb has started collecting the city’s 14% hotel tax. And in Portland, the company is working with the city as part of its "Shared City" initiative to pay the local transient lodging tax.
For states, the difficulty in applying sales tax rules is finding a comparable taxing analogue for the Internet-sharing economy. These businesses deviate from traditional businesses, such as hotels and car rental companies. As these sharing services spread across the country, state legislators continue to seek ways to apply existing tax laws written before these companies were ever imagined.
If you have any questions regarding sales and use tax, please contact Manager of Tax Controversy and State and Local Taxation, Alan Goldenberg, at firstname.lastname@example.org or 212-897-6421, or your Friedman LLP tax professional.