Get ready to start paying sales tax for online purchases

It's been a good run for tax-avoiding e-commerce customers. But now, thanks to a recent court ruling in New York, among other things, online retailers may soon be forced to charge you sales tax. Here's what happened and why:

Why didn't we have to pay sales tax on online purchases in the first place?

It all stems from a 1992 case, Quill v. North Dakota, in which the U.S. Supreme Court decided that the government can't force out-of-state retailers to collect sales taxes from buyers in states where the retailer is not physically present. Instead, the court demanded that buyers self-report and pay a use tax in those situations.

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Did anyone actually self-report such taxes?

Of course not. Most people didn't even know they were supposed to. And the ones that did generally didn't want to make voluntary tax payments.

Why is the tax-free party over?

Because of Amazon, mostly. The massive online retailer has tried hard to keep its physical presence limited to a small number of states so most shoppers wouldn't have to pay sales tax. But the e-tail giant's insane revenues have had state tax officials salivating for years. Meanwhile, brick-and-mortar stores have long complained that online retailers have an unfair advantage because they can circumvent sales tax. So starting in 2008, states began implementing an "Amazon tax" that applies to Amazon and similar online retailers like Overstock.com. Over the years, 19 states have adopted some version of this tax.

How does that Amazon tax work?

It effectively dodges the Quill v. North Dakota ruling by forcing online retailers to charge sales tax in a state where they have any kind of affiliate, marketing or otherwise. So, in Illinois for example, if an online retailer so much as works with a blogger who links to the company's products on his or her site, the retailer has to charge everyone sales tax.

It's especially tricky for Amazon's "Associates" program, which allows individuals who refer customers to the online retailer to share revenue from purchases that extend from that referral. "The Amazon tax says affiliates are the legal equivalent of a company's traveling salespeople; and a retailer has a physical presence in states where its traveling salespeople are located," says Forbes.

Ooh, tricky. So do states cash in after implementing the Amazon tax?

Actually, no. Retailers — particularly Amazon — have made a habit of cutting ties with all of their affiliates the moment a state Amazon tax goes into action, squashing the government's effort to strong-arm e-tailers into collecting sales tax. And that actually hurts some states, as companies' marketing affiliates close their doors or flee to states without an Amazon tax. California, for example, will generate just over $100 million in online sales tax revenue, not the $1.9 billion analysts had first projected.

So... why are we going to have to start paying?

For a couple reasons. First, Amazon is amping up its same-day delivery plan, which requires the company to build new distribution facilities in new states, establishing a physical presence and ensuring that residents of those states will pay sales tax.

But the no-tax deal will go away for other companies, too. Overstock.com joined with Amazon to challenge the Amazon tax in 2008's Amazon.com, LLC and Overstock.com, Inc. v. New York State Department of Taxation and Finance. But recently New York's highest court upheld the state's right to keep the tax.

So "affiliates" are running out of places to run?

Exactly. Now that the highest New York court has upheld the state's right to circumvent Quill, other states that haven't passed an "Amazon tax" have little reason not to forge ahead. Eric Goldman of Forbes puts it this way: "Other courts aren't likely to disagree with New York's highest court. Thus, for all practical purposes, I think the New York ruling probably ends the court battles nationwide."

Plus, Washington is hot on this issue. As Goldman points out, Congress is talking about imposing nationwide sales tax collection obligations, which will make the whole "Amazon tax" obsolete and require all online retailers to charge sales tax.

But it was fun while it lasted, right?