Source: https://taxfoundation.org/amazon-tax-laws-signal-business-unfriendliness-and-will-worsen-short-term-budget-problems/
Timestamp: 2019-04-21 14:51:51+00:00

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Citing significant budget shortfalls and the inability to collect sales taxes on many Internet-based transactions, a number of states are considering the adoption of “Amazon taxes.” Such laws, nicknamed after their most visible target, require retailers that have contracts with “affiliates”—independent persons within the state who post a link to an out-of-state business on their website and get a share of revenues from the out-of-state business—to collect the state’s sales tax.
Contrary to the claims of supporters, Amazon taxes do not provide easy revenue. In fact, the nation’s first few Amazon taxes have not produced any revenue at all, and there is some evidence of lost revenue. For instance, Rhode Island has seen no additional sales tax revenue from its Amazon tax, and because Amazon reacted by discontinuing its affiliate program, Rhode Islanders are earning less income and paying less income tax.
Amazon taxes also do not “level the playing field” between brick-and-mortar and online businesses; the laws actually mandate disparate burdens on online businesses. Litigation over the constitutionality of Amazon taxes is ongoing, with scholars on the left and right disputing their wisdom and legality.
Enacting an Amazon tax law also sends a signal of hostility to businesses engaged in interstate commerce, runs the serious risk of retaliation from other states and from affected businesses, and undermines efforts to improve the uniformity of state sales taxes.
Frustrated by their inability to impose tax collection obligations on companies with no substantial connection to their state, several states are considering the adoption of “Amazon” tax laws. Such laws currently exist in New York, Rhode Island, North Carolina, and Colorado.
An Amazon tax law requires retailers that have contracts with “affiliates”-independent persons within the state who post a link to an out-of-state business on their website and get a share of revenues from the out-of-state business-to collect the state’s sales and use tax.
Amazon taxes are unlikely to produce revenue in the near term. New York continues to face a lengthy legal constitutional challenge. Rhode Island has even seen a drop in income tax collections due to the law.
Amazon taxes do not level the playing field between brick-and-mortar and Internet-based businesses because they require Internet-based businesses to track thousands of sales tax bases and rates while brick-and-mortar businesses need to track only one.
Unconstitutionally expansive nexus standards like the Amazon tax undermine legal certainty, burden interstate commerce, and harm economic growth.
Enactment of an Amazon tax is an aggressive and unwise assertion of state power to collect taxes from out-of-state businesses. These taxes represent the latest in a series of efforts to eliminate the long-standing “physical presence” standard and replace it with a nebulous, arbitrary standard of “economic presence,” where businesses can be taxed in every state where they have customers.
After a wave of sales tax adoptions in the 1930s, states became concerned that consumers would escape the tax by purchasing goods and services in other states. States with sales taxes began adopting “use” taxes, which impose a tax on the use within a state of an item upon which a sales tax has not been paid. Thus, states with less competitive tax systems than their neighbors sought to tax transactions occurring in other states to equalize tax burdens — essentially a protectionist measure.
Frustrated by its residents who purchase items online but do not pay the sales or use tax they owe, New York targeted online retailers with only the slightest connection to New York by enacting what has become known as an “Amazon tax” in April 2008. It is designed to force online retailers like Amazon.com to collect New York sales tax on purchases made by New Yorkers, even though Amazon has no property or employees in New York. The law requires retailers that have contracts with “affiliates” — independent persons within the state who post a link to Amazon.com on their website and get a share of revenues — to collect New York sales tax.
2.the cumulative gross receipts from sales by that person attributable to referred customers by all residents with such an agreement are greater than $10,000 during the preceding 12-month period.
The nexus presumption would be rebuttable by proof that the resident made no solicitation in the state that would satisfy U.S. constitutional nexus requirements on behalf of the person presumed to be engaging in business in the state.
New York is collecting tax revenue but under a constitutional cloud, making it risky to spend it.
New York relied on two U.S. Supreme Court cases, Scripto, Inc. v. Carson and Tyler Pipe Indus. v. Washington Dep’t of Revenue, where in-state independent persons were so necessary and significant in establishing and maintaining the out-of-state company’s market in the state that the companies were deemed to be present in the state.21 These “attributional nexus” cases have been described by the Supreme Court itself as the “furthest extension” of nexus.
The trial court, in finding for the state and upholding the law, did not consider how significant the affiliates were in establishing or maintaining Amazon.com’s New York market; instead they simply held that Amazon.com gained economic benefits and thus nexus was established.22 Whether Amazon.com gains economic benefits is the test for employees, not for independent persons. The trial court thus confused two unrelated tests and therefore reached the wrong conclusion.
New York’s law is an unprecedented expansion of state taxing authority. The affiliates provide referrals for only 1.5 percent of Amazon.com’s sales in New York, and there is no evidence that the affiliates even target New Yorkers (they operate via websites, available worldwide). The affiliates neither engage in direct solicitation nor provide any crucial sales support for Amazon.com in the state. At minimum a court must find that the affiliates are essential for Amazon.com’s market in the state before deeming the out-of-state company to be “present” in the state under even Scripto and Tyler Pipe.
In the Quill case of 1992, the Supreme Court struck down a 1987 North Dakota law imposing a tax collection obligation on mail-order businesses, where the threshold was $1 million of in-state sales. By contrast, New York’s law applies to businesses with just $10,000 in in-state sales. Adjusting for inflation and population, the $1 million threshold in North Dakota that the U.S. Supreme Court found low enough to pose an intolerable burden in 1987 would be the equivalent of $51 million in New York in 2009, and yet New York still set its Amazon threshold at a mere $10,000.
The appellate court is expected to reach a decision sometime in 2010.
Amazon tax supporters often claim that the current tax environment is unfair to brick-and-mortar businesses in that they must collect sales tax on their sales while Internet-based businesses do not. Consequently, the Amazon tax is urged as a way to equalize this disparate treatment.
Various databases exist to assist with figuring sales tax but they are often expensive, not comprehensive, and can be slow to keep up to date. Some states offer websites with sales tax “maps” but these are not widespread and do not address which items are in the base. These shortcomings are particularly problematic for sales taxes, since under-collecting can result in heavy penalties from the state, and over-collecting can result in a class action lawsuit from customers.
Brick-and-mortar stores have long blamed everyone else for their decline: big department stores in the city, suburban shopping malls, catalogs, the Internet, and now the tax system. There is some truth in all of that, but brick-and-mortars also have the advantages of better locations for immediate purchases and deeper customer interaction. Changing the tax laws to impose new burdens on their competitors is not a productive solution for a state’s economic growth.
The real concern should be the extent of state powers. Should states be able to reach beyond their geographic borders and impose their tax system on everything everywhere? Do we really need to make sure that taxes are the same between New York and other states, and that people can’t shop by tax rates as they shop by price, quality, or convenience?
Unless every state has an identical tax system, there will be inconsistencies in taxes paid on items in different jurisdictions. Some states have high taxes and extensive public services while others prefer lower taxes and less extensive public services. This should not be viewed as a problem to be eradicated but rather an essential element of our federalism that should be embraced. Amazon taxes are incompatible with this notion of limiting states’ powers to prevent harm to the national economy, because they presume that states should have whatever power is needed to equalize tax rates.
The people of the United States adopted the U.S. Constitution in large part because their existing national government had no power to stop states from imposing trade barriers between each other, to the detriment of the national economy.24 In the Commerce Clause of the U.S. Constitution, Congress and the courts thus have the power to strike down laws that burden interstate commerce.
The economic and technological developments of the past few decades make preserving a bright-line physical presence nexus rule for state taxation all the more vital. The importance of the Commerce Clause and its protections for interstate business is only enhanced in an age of economic integration. “Today’s more integrated national economy presents far greater opportunities than existed in 1787 for states in effect to reach across their borders and tax nonconsenting nonbeneficiaries.” Daniel Shaviro, An Economic and Political Look at Federalism in Taxation, 90 Mich. L. Rev. 895, 902 (1992). Regrettably, because economic integration is greater now than it was in 1787, the economic costs of nexus uncertainty are also greater today and can ripple through the economy much more quickly.
Widespread adoption of vague and expansive nexus standards will expand these compliance costs and cause adverse impacts on interstate commerce. Compliance costs for businesses engaged in interstate commerce will increase. Businesses that merely expand their sales into such states will have to understand the local tax base, any applicable tax rates, available tax incentives, and differing apportionment formulas. Differing nexus standards among the states means businesses will have to guess about whether to file and pay taxes or not.
Concerns about the cost of complying with multiple state tax systems, and the resulting economic harm, was at the heart of the Quill decision. The Court specifically recognized that economic harm that would come from requiring Quill to potentially collect tax in over 6,000 (now 8,000) separate tax jurisdictions, all with different tax systems.25 Such concerns are equally pressing in this case, where an unconstitutional and breathtakingly expansive nexus standard will lead either to a decrease in economic expansion or a lower rate of return for those that choose to press ahead.
The Amazon tax is just the latest in a series of efforts to eliminate the long-standing “physical presence” standard and replace it with a nebulous, arbitrary standard of “economic presence.” Businesses throughout our nation’s history could always ply their trade across state lines. Today, with new technologies, even the smallest businesses can more easily reach across geographical borders to sell their products and services in all fifty states. If such sales can now expose these businesses to tax compliance and liability risks in states where they merely have customers, they will be less likely to expand their reach into those states.
1 Also known as affiliate nexus taxes or affiliate taxes.
2 See Henneford v. Silas Mason Co., 300 U.S. 577 (1937).
3 See Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977); National Bellas Hess, Inc. v. Dep’t of Revenue of State of Ill., 386 U.S. 753 (1967); Quill Corp. v. North Dakota, 504 U.S. 298 (1992).
4 For an extended discussion, see my paper “Why the Quill Physical Presence Rule Shouldn’t Go the Way of Personal Jurisdiction”, 46 State Tax Notes 387 (2007), http://tinyurl.com/quillnexus.
6 Current members are Arkansas, Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Nebraska, Nevada, New Jersey, North Carolina, North Dakota, Ohio, Oklahoma, Rhode Island, South Dakota, Tennessee, Utah, Vermont, Washington, West Virginia, Wisconsin and Wyoming.
7 See, e.g., Joseph Henchman, “SSTP is Not All It’s Cracked Up to Be,” Tax Foundation Tax Policy Blog (Jul. 23, 2009), http://www.taxfoundation.org/legacy/show/24919.html; Mark Robyn, “I’ll Have Some Margarita Mix To Drink and a Packet of Lemonade Mix for Dessert,” Tax Foundation Tax Policy Blog (Jul. 7, 2009, http://www.taxfoundation.org/legacy/show/24827.html; Joseph Henchman, “Nearly 8,000 Sales Taxes and 2 Fur Taxes: Reasons Why the Streamlined Sales Tax Project Shouldn’t Be Quick to Declare Victory,” Tax Foundation Tax Policy Blog (Jul. 28, 2008), http://www.taxfoundation.org/legacy/show/23423.html.
8 See, e.g., John Buhl, “‘Amazon’ Laws Not Ideal Solution to Remote Sales Tax Issue, Panelists Say,” State Tax Today (Feb. 9, 2010), http://services.taxanalysts.com/taxbase/tbnews.nsf/Go?OpenAgent&2010+STT+26-1 (subscription req’d).
9 Joseph Henchman, “Colorado Modifies ‘Amazon Tax’ Proposal,” Tax Foundation Tax Policy Blog (Feb. 11, 2010), http://www.taxfoundation.org/legacy/show/25838.html.
10 See, e.g., Joseph Henchman, “Eight States Consider Adopting New York’s Problematic ‘Amazon Nexus’ Law,” Tax Foundation Tax Policy Blog (Apr. 22, 2009), http://www.taxfoundation.org/legacy/show/24638.html.
11 Cy Ryan, “Gibbons budget plan calls for higher taxes, fees,” Las Vegas Sun (Feb. 17, 2010), http://www.lasvegassun.com/news/2010/feb/17/gibbons-budget-plan-calls-higher-taxes-fees/.
13 Ted Nesi, “‘Amazon tax’ has not generated revenue,” Providence Business News (Dec. 21, 2009), http://www.pbn.com/detail.html?sub_id=2976531d0961&page=1.
14 Shawn Collins, “Advertising Tax Generates Zero Taxes in Rhode Island,” AffiliateTip.com (Feb. 2, 2010), http://affiliatetip.com/news/article003119.php.
15 David Sims, “Virginia Advances Online Sales Tax Despite Track Record,” TMCNet (Feb. 11, 2010), http://voice-quality.tmcnet.com/topics/phone-service/articles/75297-virginia-advances-online-sales-tax-despite-track-record.htm.
16 Telephone interview with Robert Whitt, Spokesman, North Carolina Department of Revenue (Mar. 3, 2010).
17 Virginia Department of Taxation, Fiscal Impact Statement for S.B. 660, http://leg1.state.va.us/cgi-bin/legp504.exe?101+oth+SB660F161+PDF.
18 Michael Mazerov, “New York’s ‘Amazon Law’: An Important Tool for Collecting Taxes Owed on Internet Purchases,” Center on Budget and Policy Priorities Report (Jul. 23, 2009).
19 Mazerov’s response was to a question posed by the author at a Tax Analysts panel on Feb. 5, 2010.
20 The Tax Foundation has filed an amicus curiae brief in support of Amazon.com in the appeal. See Joseph Henchman & Justin Burrows, “‘Amazon Tax’ Unconstitutional and Unwise,” Tax Foundation Fiscal Fact, No. 187 (Sep. 15, 2009), http://www.taxfoundation.org/legacy/show/25120.html (citing Tax Foundation Amicus Curiae Brief in Amazon.com, LLC v. New York State Department of Taxation and Finance, No. 601247-2008).
21 See Tyler Pipe Indus. v. Washington Dep’t of Revenue, 482 U.S. 232, 250 (1987) (stating that the non-employee’s activity must be “significantly associated with the taxpayer’s ability to establish and maintain a market in [the] state for [its] sales.”); Quill Corp., 504 U.S. at 249. See, e.g., Scripto, 362 U.S. at 211 (finding physical presence where 10 independent contractors engaged in a “local function of solicitation” that was “effective in securing a substantial flow of goods into [the state]”); Tyler Pipe, 482 U.S. at 251 (finding physical presence where in-state independent contractors “acted daily on behalf of [an out-of-state company] in calling on [in-state] customers and soliciting orders,” rendering them “necessary for maintenance of [the company’s] market and protection of its interests.”); Quill Corp., 504 U.S. at 249.
22 See Amazon.com LLC v. New York State Dept. of Taxation and Finance, 877 N.Y.S.2d 842, 849 (N.Y. Sup. 2009) (“Amazon further states that Associates’ referrals to New York customers are not significantly associated with its ability to establish and maintain a market for sales in New York… None of these allegations, however, sufficiently state a claim for violation of the Commerce Clause.”).
23 See Id. (“Amazon has not contested that it contracts with thousands of New Yorkers and that as a result of New York referrals to New York residents it obtains the benefit of more than $10,000 annually. Amazon should not be permitted to escape tax collection indirectly, through use of an incentivized New York sales force to generate revenue, when it would not be able to achieve tax avoidance directly through use of New York employees engaged in the very same activities.”).
24 See Gibbons v. Ogden, 22 U.S. (9 Wheat.) 1, 224 (1824) (Johnson, J., concurring) (“[States’ power over commerce,] guided by inexperience and jealousy, began to show itself in iniquitous laws and impolitic measures . . ., destructive to the harmony of the states, and fatal to their commercial interests abroad. This was the immediate cause, that led to the forming of a convention.”).
25 See Quill, 504 U.S. at 313 n.6.

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