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The 'Amazon Tax': Friend or Foe?

Some fear the battle to force online retailers to collect sales taxes could neutralize tax revenue.


Penelope Lemov

Penelope Lemov is a GOVERNING correspondent. She was GOVERNING's health columnist and was senior editor for several award-winning features.


Commented June 13, 2010

wat it do world

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Look at the numbers: The Monday after Thanksgiving - Cyber Monday 2009 - consumers spent nearly $900 million shopping online. That's a 5 percent jump over Cyber Monday 2008. A portion of that is a base for sales tax revenue that's not being harvested for state and local coffers, and the totals for Christmas retail sales aren't in yet.

National retailers like Walmart and Best Buy are collecting sales taxes from their Internet customers in states where they maintain stores - they've got physical nexus, the basis for requiring collection of the sales tax, according to the Supreme Court's 1992 Quill Corp. v North Dakota decision. But online-only companies, such as Amazon and Overstock, are not.

In an effort to chip away at that revenue loss, New York State legislators passed a law requiring Amazon and other Internet retailers to collect sales taxes from New York customers who buy through affiliates on the retailers' Web sites. Amazon challenged the law in court and lost in January. The case is now before a New York appeals court, which is expected to issue its decision in a few months.

While the ruling will directly affect New York - as well as North Carolina and Rhode Island, which passed similar laws - other states are following the case closely. If the law stands, they might follow the same legislative path.

How good an idea is New York's approach, which has been dubbed the "Amazon tax"? I put that question to two experts - Steve DelBianco, the executive director of NetChoice, a coalition of e-commerce companies, and Michael Mazerov, a senior fellow with the Center on Budget and Policy Priorities. DelBianco is against it; Mazerov, for it. Here are highlights of what they had to say:

What don't you like about the Amazon tax?

Steve DelBianco: It's all pain and no gain. Businesses that host ads in exchange for commissions on sales are finding that when a state passes this law, the advertisers stop advertising with the Web sites in that state. After North Carolina passed its law, for example, advertisers stopped using MarketAmerica because they didn't want to bear the burden of collecting the North Carolina sales tax. As a result, MarketAmerica picked up and moved to Florida. So North Carolina no longer collects income tax on that business or from the employees who worked there.

Are there other ramifications?

SD: Public schools suffer, too. The Box Top Marketplace raised $300 million through affiliate advertising for schools - 70,000 public schools are using it. Box Top directs parents of kids to shop online through the Box Top Marketplace. The vender who makes a sale pays a commission back to the PTA and that helps schools buy microscopes and playground equipment. But online companies like Amazon and Overstock won't put Box Top on their sites in any state that has the law.

I was at the National Conference of State Legislatures meeting in San Diego a few weeks ago, and a North Carolina legislator told us that the money the state is raising from this new law is inconsequential. New York is the only state collecting a substantial amount of money, and that's because Amazon is collecting the sales tax on its online sales under protest while suing to overturn the law. If the law is not overturned, Amazon won't continue its affiliate program.

Do you see a fairness issue here?

SD: The law is discriminatory against online advertisers. Newspaper ads in the Washington Post refer readers to a Web site for a good deal, or you might watch an infomercial on television and dial an 800 number to buy something. In all those cases, the advertiser pays a commission to the newspaper or TV station. Those transactions are not covered by the affiliate nexus law.

There's another fairness issue. The Supreme Court twice ruled that it is unfair to require out-of-state merchants to collect sales tax in states where they don't have a physical presence. The complexity of the sales tax, the court said, is an unreasonable and unfair burden.

Haven't states streamlined their sales taxes?

SD: Twenty-two have, but Congress has not yet endorsed it as sufficiently simple to merit a collection mandate. Frustration over streamlining has led to going down the path of an affiliated tax.

What do you see as the key issues?

Michael Mazerov: This is not a new tax. It's a new policy to require companies like Amazon and Overstock to collect existing and legally due sales taxes from their customers. Before states ask others to pay more, they should make sure that the taxes that are legally due are collected.

The failure to collect these taxes provides a competitive disadvantage of 5 to 10 percent for Main Street businesses that have to collect the tax. And, failure to collect taxes from Internet sales makes the sales tax even more burdensome for lower income people than it already is. Many low-income people don't have computers, high-speed Internet access or credit cards, so they shop in stores. It's upper-income people who tend to benefit from not having to pay sales tax online.

What about the argument that the sales tax is too complex and burdensome to collect from customers all over the country? That was the basis of the Quill decision and the Supreme Court's admonishment to the states to go to Congress for relief.

MM: The Streamlined Sales Tax Project has been making progress in simplifying and harmonizing state and local sales tax laws, and that's something I support. That said, there are lots of companies that even under the existing system manage to collect the sales tax in every state that has one. Walmart and Best Buy, for instance, charge online customers a sales tax in every state where they have a store, which is virtually every state. The complexity doesn't justify an exemption for similarly large and sophisticated companies like Amazon, which are capable of complying with existing rules. The argument of complexity for a small business is a legitimate one.

Some Web companies are leaving states that pass laws similar to New York's. Isn't that a problem?

MM: In reaction to the law in North Carolina, Amazon said it would not allow affiliates to sign up in that state anymore. If New York were to win and if every state enacted a similar law, would Amazon be willing to stop marketing through affiliate programs? This is a key form of marketing for many businesses, which only pay a commission to the host site when a click through results in a sale. I understand Amazon wanting to send a message by cutting off affiliates in a couple of states to scare those states off, but I question whether they could actually do that if every state enacted a similar law.

What's at stake here?

MM: If this law were to catch on in every state, collections would be in the hundreds of millions of dollars. These laws say that if you have a certain amount of online sales in a state through affiliates, you have to tax all online sales into the states, whether or not they are affected by affiliates. Affiliates create nexus, and nexus is all or nothing.

A question for newsletter readers:
If New York wins, do you think your state would be tempted to follow the Empire State's lead? E-mail me your comments.

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