The Tax Foundation released a special report on Monday that indicates that the “Amazon Tax” laws signal business unfriendliness and will worsen short-term budget problems. Currently, four states (North Carolina, Colorado, Rhode Island and New York) have some form of a  law that require Companies that have “affiliates” in their states to collect sales tax from their customers in that state.

For those that may be unclear as to exactly what an affiliate is, let me explain it as simply as I can and use Amazon.com as an example.  Amazon allows other website owners to post links or advertisements to their products on their website. In exchange, Amazon pays those website owners a small commission on the products sales that this generates. Simply put, these website owners are basically providing a targeted advertising medium to Amazon. What the “Amazon Tax” law does is it requires Amazon (or other Internet retailers) to collect sales tax in a particular state, even if Amazon has no physical presence in that state.

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Sales and use tax has always been a confusing issue and every state has different laws to add to the confusion.  The general rule of thumb has been that if it is tangible, it is taxable.  Usually labor and services are not subject to sales tax.  Well, throw that rule out the window when it comes to digital property in North Carolina.

Effective for 2010, digital property is now taxable even if it is delivered electronically.  “Digital works” includes (1) an audio work; (2) an audiovisual work; (3) a book, a magazine, a newspaper, a newsletter, a report, or another publication; (4) a photograph or a greeting card.  These are some big changes and the issue has not been publicized much.

Sellers of these products should take note of the changes and begin to charge sales tax if they are required to collect in North Carolina.  Buyers should also beware — use tax may be due.  If the seller is not required to collect tax in NC and you as the purchaser are in NC, you should still remit the applicable tax as use tax.

For the full detail of the changes from the North Carolina Department of Revenue, please review the notice at http://www.dornc.com/taxes/sales/impnotice_digital_property09.pdf.