Monday, April 19, 2010

Publishers Should Address State Tax Exposure Regarding the New Agency Pricing Model

As discussed in eBooknewser on April 16, and in TechFlash on April 15, Amazon is now allowing some publishers to set their own prices on e-books sold for the Kindle.  The agency pricing model creates new responsibilities for some publishers in connection with state tax.  Publishers with agency agreements with Apple and Sony, the other main players in the e-book market, also face state tax ramifications stemming from agency pricing agreements.

A publisher becomes a retail seller required to collect and remit sales and use tax on all sales of digital books in each state where digital books are taxable and in which the publisher has nexus.  At this point, of the 45 states and the District of Columbia that impose sales tax, only 24 states actually tax digital products.  But that number is likely to increase as states search for additional revenue.

Another effect of the agency model is that the publisher will be deemed to have nexus in each of the states where its agent—Amazon, Apple or Sony—has nexus in connection with its agency responsibilities of  selling and serving the sale of digital books by the publisher. See Scripto, Inc. v. Carson, 362 U.S. 207; 80 S. Ct. 619; 4 L. Ed. 2d 660 (1960).  But, not only should the publisher review nexus acquired through its arrangements with its e-book sellers, it must also consider nexus on a company-wide basis.  Under well-established U. S. Supreme Court precedent (see National Geographic Society v California Board of Equalization, 430 U.S. 551, 556; 97 S. Ct. 1386; 51 L. Ed. 2d 631 (1977), nexus is based on the activities of all divisions of a company.  Thus, even if the publisher’s activities with regard to print books are unrelated to its sales of digital books, and even though such sales are conducted by separate personnel from separate offices, the publisher will be required to collect sales and use tax on retail sales of e-books in each state in which its print division has nexus.

Other state tax issues are raised by the new digital book model, as well.  Questions include whether the company will have nexus for income tax purposes and gross receipts tax purposes, and whether the protections of Public Law 86-272 will continue to be available.

There are certainly ways to reduce state tax exposure for publishers.  Thus, knowledgeable publishers are considering ways to mitigate state tax exposure before they launch full-scale the agency model.

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