How states should tax Internet sales is one of the hottest issues in state legislatures today, as cash-strapped states look to close perceived loopholes and put more money in their coffers. California recently passed a law requiring out-of-state retailers to collect sales taxes on purchases made by California customers. This new law particularly affects Amazon.com, and other large online merchants, who up to now have not charged sales taxes on purchases made in the state. So if you’re a Californian who has been used to enjoying tax-free purchases from Amazon on anything from large screen TVs to groceries or clothing, those times are quickly coming to an end.

California is not alone. Illinois passed a law back in April. And Colorado, New York, North Carolina, and Rhode Island also impose some form of the law as well.

If you’re an Amazon (or Overstock) affiliate in California or Illinois, you’re already well aware that the online giant countered these new laws by announcing it will cancel its California affiliate program.

This act has left California affiliates scrambling. Sure, there are other affiliate networks like Commission Junction, PepperJam, and Linkshare, but nothing is as comprehensive and potentially lucrative as Amazon. It’s been reported that there are over 25,000 affiliates in California alone.

Besides looking for alternative affiliate networks, California and Illinois affiliates can consider moving their company out of state in order to continue having a relationship with Amazon. While it’s best to seek advice from a lawyer on your specific situation before proceeding, in general ‘moving a business’ entails the following steps:

1. Incorporate your business in another state (Delaware, Nevada, Wyoming)

While I normally don’t recommend small companies to incorporate in a state other than their home state, this situation is different. If Amazon or Overstock represents a significant portion of your
business, you’ve got to take the necessary actions to keep that revenue coming in.  If you’re already incorporated in California, you’ll first need to dissolve that corporation and then establish a new LLC, S-Corp, or C-Corp in a new state. Alternatively, you can keep your existing California corporation and establish a new business in Delaware, Nevada, or Wyoming to handle your Amazon and Overstock business.

Please consult with your CPA to figure out the best timing for this action in terms of tax implications. Fortunately, it can be relatively quick and painless to incorporate your new company online once you’re ready to do so.

2. Establish an in-state business address

You’re not actually required to maintain a Delaware business office address aside from the address of your Delaware Registered Agent (which you’ll get when you incorporate your business online). However, to open a bank account and establish a presence in Wyoming, you’ll want your own in-state address. You can contact a mailbox or virtual office service to set this up.

3. Open an in-state bank account

Once you have an in-state business address, you can set up a business bank account in your new state.

4. Establish a Federal Employer Identification Number (EIN)

You’ll need to obtain a tax ID number from the IRS for your new company. You can apply for your EIN online through the IRSsite.

5. Get any necessary local business licenses

Don’t forget to apply for any local business licenses from the city or county where you have established your new business.  

If you aren’t located in a state currently affected by these new sales tax laws, you should still keep a close eye on your state’s legislative activity. It’s likely that other states will follow suit in an effort to solve their budget crises. And if you are impacted, be aware that these new state laws don’t necessarily have to close the door entirely on your business. There’s still hope that you can continue working with Amazon or other online merchants, but you should always consult with your CPA and attorney to determine that these steps are right for your business.