The Amazon Tax on e-Commerce: Coming Soon to a State Near You 16 comments
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Background: Last year, New York started requiring certain out-of-state online vendors to collect and pay New York sales tax on purchases made by New York residents. This has become known as the “Amazon tax,” because Amazon (AMZN) was one of the high profile sites affected and embroiled in the ensuing controversy.
In order to impose sales tax collection requirements on out-of-state vendors, New York had to get around the 1992 U.S. Supreme Court ruling in Quill v. North Dakota (504 U.S. 298 (1992)), which held that out-of-state retailers cannot be required to collect sales tax on sales to persons in states where the retailer does not have a physical presence, because requiring merchants to adhere to the complexities of the state and local tax codes would place an unreasonable burden on interstate commerce.
The New York law gets around Quill by claiming that a physical presence can be established for an out-of-state online retailer (like Amazon) if sales are derived from affiliate sites located in New York that link to Amazon products from their sites with the objective of receiving commissions on the sales. The New York law only applies to online retailers that collect at least $10,000 in annual revenue from affiliates located in New York (unless there is some other physical presence found). It is important to note that prior to this new law, New York consumers were required to report these out-of-state purchases on their tax returns, but this was a law observed in the breach - nobody really did it. The new law is expected to raise $50 million a year – important money in these times of shrinking tax revenue for local municipalities.
Fallout: There were two predictable backlashes from the Amazon tax:
(1) A lawsuit seeking summary judgment against New York, which was filed by Amazon and Overstock (OSTK). However, on January 12, 2009, a New York State judge dismissed those lawsuits, potentially throwing the case into the Court of Appeals.
(2) Cancellation of relationships with New York affiliates, which was done by Overstock in an effort to demonstrate that the Amazon tax will actually result in a decrease in tax revenue due to loss of income by New York affiliate sites.
Current Developments: In the next few weeks, legislators are expected to introduce bills drafted by the National Conference of State Legislatures in the House and Senate doing away with the “physical presence” requirement. The result is that states would be able to require out-of-state vendors to collect sales tax from in-state purchases. If such a bill passes, all online retailers, except for the smallest, would very quickly be required to collect sales taxes in the 23 states that are part of the Streamlined Sales Tax Project. Other states would soon follow suit.
The question is not whether such a bill will pass, but only when it will pass. However, the jury is out as to whether such a bill will pass in 2009. The argument that imposing sales tax would hamper the growth of the Internet no longer holds much water now that the Internet has become a powerful and entrenched economic environment. Amazon actually supports the federal legislation, but is concerned about the difficulty of complying with a myriad of state and local sales tax regimes. eBay (EBAY), on the other hand, is very against the measure, because such a law would impose a burden on its sellers to collect and pay the taxes (and not on eBay).
Practical suggestions/pointers:
Expect more states to try to emulate New York and not wait around for federal legislation. For instance, a proposal to tax certain online sales in Maryland modeled after the New York law was initiated this year, but remained in committee a few days before the end of the Maryland General Assembly's regular session. Maryland estimates it could raise $7 million annually from such a tax.
Expect affiliate marketing programs that have served to speed the growth of the Internet and e-commerce to become more restrictive in order to avoid these new laws.
Start planning and budgeting for resources necessary to comply with sales tax collection laws from numerous states – because it’s only a matter of time.
Disclosure: No positions
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This article has 16 comments:
Tea parties mean nothing. Outrage at taxation during a depression means nothing. SCOTUS means nothing (they support the government at every ruling, not the people).
The state will tax anything it wants to and you will do nothing about it.
You keep talking about tax revolts, but you Americans never do anything but reward new spending...and fall in line to stone anyone who cuts spending to you, your kids, or your particular industry.
Get the ink on your arm: Spending = Taxes.
This is an excellent opportunity for an "Taxamai", a web presence service that would automatically compute the location specific tax based on the delivery address of a shipment. Companies like Vertex and its competitors already have point of sale computation software that attaches directly to ERM databases. It would be a simple task to webify the engine and host it at Amazon, Google, Yahoo, MS and other major server farms.
The selling website engines executing in the server farm could do an messaging call to the hosted Vertex engine as the transaction is processed. There really isn't that much to this.
It kind of irks me that this is an issue at all. People seem to have a general issue with any government at all; but if there is a level of government that directly affects your life and mine, it is the states and counties that receive sales tax revenue. There are things that simply must be done to preserve the livability of any human society, and people have hamstrung state and local governments with property tax limitations severely. They have to get revenue from some source; what's not to like about having it from the people in another state?
I know the answer to this that most of you will bellow: I don't want to pay it. Well, one thing that's pretty true of web folks: as a group we are narcissistic cheapskates. We think the world revolves around us and that we deserve something for nothing. Feh!
What mindless drivel.
On May 01 06:52 PM LKofScotland wrote:
> i must agree with this tax debate. clearly the real solution is
> declare as your leader has meaningless the imposition of paper money
> with white colonial slave holders' faces on it. no man can be a
> true man and accept such debasement. washington, jefferson, jackson--even
> frankin it is rumored employed slaves and debased the african man.
> and grant of course ended your american "reconstruction" early and
> delayed our inevitible rise to power that way. these objects must
> be rendered impotent. if your leader is as clever as he appears
> his secret weapon will be the guilt of the white man himself. with
> any luck it will be combined with the secret guilt of the white women
> as well thus making the result a "fait accompli." no one shall deny
> the awesome power and fear of such centralized command and control.
On May 01 04:05 AM Steven Hansen wrote:
> gee, i don't remember which economic theory says that increasing
> taxation in recessions increases economic activity. God save us
> from politicians.
>
>
Not only is the revenue sorely needed by states, but it will "level the playing field" so brick-and-mortar retailers are not so disadvantaged. Amazon can afford whatever slowdown this entails for them; the equalization will help keep local businesses alive.
seekingalpha.com/artic...
I'm very happy to read your update on the situation. Can you please explain why Amazon would be supporting the federal legislation that would require them to collect sales tax? It would put an extra burden on the company and at the same time, I believe it would drastically lower their sales.
When only NY State imposed sales tax collections on Amazon, they went out of their way to sue, challenging the constitutionality of the new law. I fail to understand why they would support such a law on a national level. If that is accurate, it's a bad call. They'd be better off joining forces with eBay, Overstock and other powerhouse internet sellers to fight the legislation. Together they would be a formidable opponent.
Technically, when Americans sell even their used goods at a garage sale, they are supposed to report the income to the IRS and pay their income taxes on these sales. No one really did. But with some individuals making six or even seven figures on ebay every year, the IRS has been paying more attention. They've been pressuring eBay to release information that would enable them to charge income tax on these sellers. Information which is readily accessible if eBay chose to cooperate (as opposed to a garage sale which the government would likely never know about). So far eBay has resisted for obvious reasons.
On May 02 01:16 PM Option Maestro wrote:
> Agreed 100%... Is the Ebay tax going to be on all goods or just "new"?
> If it is just on new items, I believe the secondhand market will
> thrive.