States, retailers spar over taxation measures

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Jonathan Johnson, president, Overstock.com
Jonathan Johnson, president, Overstock.com

Retailers are again rallying to fight state initiatives to tax merchants who do business with residents without a physical presence in their states. 

Ohio became the latest front between state governments and multichannel retailers when the state reportedly hit at least one out-of-state retailer with assessments for back taxes and penalties. The state cited its Commercial Activity Tax (CAT), enacted in 2005, on companies doing business in the state, claiming the measure is not bound by companies having a physical presence within its borders.

L.L. Bean was served notice that it owes Ohio taxes and penalties for failure to pay the CAT from July 2005 to March 2008. L.L. Bean representatives did not reply to calls and e-mails seeking comment on the issue.

Overstock.com is also in the process of asking the state's tax authority to investigate whether it owes the state additional taxes.

“The Ohio law says that if you do a certain amount of sales in Ohio, then you can be taxed,” said Jonathan Johnson, president of Overstock.com. “But we don't have any people or facilities in Ohio. We don't have anything in Ohio other than the customers who buy things from our website, and we have deals with the UPS and US Mail to deliver there.”

Other states are also moving to collect unprecedented taxes from out-of-state retailers. Michigan has a similar measure to Ohio's on the books, and states including Colorado and Oklahoma require consumers using retail sites to pay additional taxes on purchases. Although those states do not directly tax the merchants, retailers have argued that the states place an unfair administrative burden on companies to collect and report consumer information.

Industry groups, such as the Direct Marketing Association (DMA) and the American Catalog Mailers Association, are fighting the Colorado measure in court. “Ohio is using an economic nexus theory that says if you have any activity within that state, that gives us the nexus to tax you and no physical presence is needed,” said Jerry Cerasale, SVP of government affairs at DMA.

Chris Bradley, CEO of Cuddledown, a Maine-based cataloger of comforters and other linens, said that his company is complying with all state tax demands, but working with industry groups to fight them legally.

“I think that's what any small- or medium-sized cataloger is most likely doing these days,” Bradley said.

John Kohlstrand, communications director for the Ohio Department of Taxation, said that the CAT is neither a sales tax nor a state budget issue, but a requirement that dates back to 2005. He said that previous court decisions have ruled that the CAT is a business privilege tax, and not a state sales tax.

“I think everyone has assumed from the beginning that there would be litigation to clarify this nexus standard,” he said.

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