Tax Foundation Takes On Amazon Tax

Yesterday I wrote a lengthy article about the Amazon Tax. In this follow-up I review an important new study from the Tax Foundation, “‘Amazon Tax’ Laws Signal Business Unfriendliness and Will Worsen Short-Term Budget Problems.”

Note that, in my previous article, I used the phrase “physical presence” broadly, to include any sort of presence a state might claim to extend tax jurisdiction onto an out-of-state business. Joseph Henchmen, author of the Tax Foundation study, distinguishes a “physical presence” narrowly interpreted as an actual store front from an “economic presence.” I meant to include any such “presence” in my previous article. (In the broad sense, any presence must be “physical” in nature, though a “presence” need not include a physical store front so far as various states want to define it.)

Given the Tax Foundation issued a news release about the study, I’ll begin by reproducing much of that before reviewing the study itself.

As more states consider enacting so-called “Amazon tax” laws to force online retailers to collect sales taxes, a new Tax Foundation report cautions that such policies would not only fail to relieve short-term budget problems but also hurt long-term economic growth.

New York, Rhode Island, North Carolina and Colorado have Amazon taxes, and the Multistate Tax Commission last week indicated its plans to draft model legislation based on the laws in place in those states.

“Enactment of an Amazon tax is an aggressive and unconstitutional assertion of state power,” said Joseph Henchman, the Tax Foundation’s Tax Counsel and Director of State Projects, who authored the report. “These taxes are the latest in a series of efforts to eliminate the long-standing ‘physical presence’ standard and replace it with a nebulous, arbitrary ‘economic presence’ standard, where businesses can be taxed in every state where they have customers — meaning retailers large and small must track more than 8,000 sales tax rates and bases.”

“This flies in the face of the argument that Amazon taxes ‘level the playing field’ between brick-and-mortar and Internet-bases businesses,” Henchman said.

Tax Foundation Special Report, No. 176, “‘Amazon Tax’ Laws Signal Business Unfriendliness and Will Worsen Short-Term Budget Problems,” is available online athttp://www.taxfoundation.org/ publications/show/25949.html.

Amazon taxes (also known as affiliate nexus taxes or affiliate taxes) 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’ sales and use tax. Even groups such as the National Conference of State Legislatures and the Streamlined Sales Tax Project oppose Amazon taxes.

Amazon taxes are unlikely to produce revenue in the near term, according to the report. New York continues to face a lengthy legal constitutional challenge, and Rhode Island has even seen a drop in income tax collections due to the law.

Unconstitutionally expansive nexus standards such as Amazon tax laws threaten interstate commerce and the national economy by discouraging business expansion.

“The real concern should be the extent of state powers,” Henchman said. “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 in all states, and that people can’t shop by tax rates as they shop by price, quality or convenience?”

Henchman expands his arguments in the full study.

Henchman reiterates the basic reason why Amazon cut off its Associates program in Colorado: the tax measure is contingent on Amazon’s “presence” in Colorado.

Henchman next points out that Rhode Island is actually losing money because of its Amazon Tax: “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.”

What is telling is that Colorado Democrats imposed an Amazon Tax here, even after the failure of such a tax elsewhere.

Henchman reinforces another point I’ve made: “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.” Henchman mentions that online retailers must “track thousands of sales tax bases and rates,” but Colorado’s law imposes even worse bureaucratic red tape.

Henchman describes how sixteen different states (including Colorado) have either imposed or attempted to impose an Amazon Tax.

“Use” taxes, taxes supposed to be paid by consumers on out-of-state purchases, arose in the 1930s, Henchman notes. In 1937 the Supreme Court approved “use taxes” but required them to be collected from in-state residents, not out-of-state businesses. However, Henchman notes, “use taxes are practically unenforceable.”

Henchman also includes important background on attempts of states to simplify sales taxes:

Several dozen states have banded together to form the Streamlined Sales Tax Project (SSTP), an effort to simplify and harmonize state sales taxes in the hope that Congress or the Supreme Court will permit states to enforce use tax collection obligations on out-of-state companies. While the SSTP has made notable progress on adopting uniform sales tax definitions and procedures, meaningful efforts to simplify sales taxes (such as by reducing the number of sales taxing jurisdictions or aligning them with zip codes) have been actively avoided in the hopes of attracting more members. [See also Henchman’s notes in the study.]

According to Henchman, the SSTP opposes states’ Amazon Taxes, though a few states (again including Colorado) have broken ranks and tried to run roughshod over the U.S. Constitution.

Henchman briefly describes the Colorado amendment regarding affiliates: “Colorado followed in 2010 with a version that removed language asserting that affiliates trigger the obligation to collect sales tax but that added a requirement to notify residents with use tax liability.” Notice that the amendment in no way removed the bureaucratic nightmare imposed on Amazon, as Colorado’s left has tried to pretend.

Henchman has more on the Colorado amendment elsewhere:

The Council on State Taxation (COST) has alerted us that the Colorado bill, HB 1193, has been amended in two significant ways.

First, the bill drops the “Amazon” affiliate nexus provision but adopts an “ordinary” attributional nexus provision similar to those seen in New Jersey and a few other states. This is a less aggressive expansion of the definition of “physical presence,” holding that a company has nexus if a “component member” of a larger “controlled group” has physical presence in Colorado. The Supreme Court has previously considered this is the “furthest extension” of nexus, and it sends a bad signal to the interstate business community.

Second, the bill makes life very unpleasant for out-of-state companies that do business in the state. Sellers must notify each buyer that sales tax is due on the transaction or face a $5 per transaction fine. Sellers must also send each buyer an annual tally of all purchases, and this information would be given to the state as well. It’s essentially all the obligations of tax collection without the actual tax collection.

Thus, while the Colorado amendment solved one problem in alleviating some burdens on Associates, it created other problems, particularly by increasing the bureaucratic burdens on Amazon.

Critically, though, the bill still requires (as it must under the Commerce Clause) a business nexus in the state; some sort of relevant “presence.” The amendment did nothing to address that (as that would have rendered the bill moot), and that is why Amazon dropped the Associates program. As I discussed, various leftist commentators have tried to pretend that the amendment makes Amazon’s decision to drop its Associates arbitrary. It does not. Amazon sought to remove its business “presence” by closing down its Associates program. Nothing about the amendment addressed that gigantic problem.

I have touched on Henchman’s major points; the rest of his study is worth perusing.

Join the Google Group “Repeal the Amazon Tax.”
See Diana Hsieh’s new web page, RepealTheAmazonTax.com.

1 thought on “Tax Foundation Takes On Amazon Tax”

  1. Comment by bil_dM arch 12, 2010 at 12:35 PM

    Today’s Denver Post had numerous letters regarding the Amazon Tax. The lead letter was penned by Eric Grimm, Colorado Springs. My reply would not see the light of day in the Post(due to size limits), therefore I am hopeful it will here..

    Dear Grimm,

    First of all, to characterize Amazon Inc as a “predator,” is beyond ludicrous. Amazon is a for-profit business working very hard to make money and be successful in the marketplace. They employ many people and strive very hard to make a profit, the very thing that creates any and all innovation and product or service improvement. Without online retailers such as Amazon, many authors and book buyers would have little access and less impetus to earn a living as a writer, or to become enlightened and entertained through reading great books. The market for books is incredibly larger today due precisely to their presence, innovations, and cost structures. Everyone wins, except unprofitable or inefficient book dealers who seem to think, as inefficient family farmers do in certain places, that they are owed a living merely due to the fact they walk, talk, and breath; realities of supply, demand and real costs to be damned. To characterize an innovator who has enriched the lives of, and caused great increases in the standard of living for, millions around the world as predatory is no different to calling Microsoft or Apple predators; incorrect, ignorant, and irrational.

    Next, you wail that Amazon does not pay its fair share of taxes. Without engaging you in this nebulous concept of “fairness,” please note that Amazon is a Washington state based company with zero physical presence in the State of Colorado. They have no reason, obligation, or duty to pay a penny of tax to any entity outside of the taxing jurisdiction in which they live. You are profoundly ignorant of the fact that Amazon pays huge sums of tax in that jurisdiction, as well as to the federal government (amounts far greater than any direct benefit they receive back). Moreover, we live under a federal constitution here in the United States that requires all taxation across state lines to be equitable; imposing taxes on a Washington corporation to the singular benefit of Colorado flies squarely in the face of this important constitutional provision. You need to check your premise, it is severely flawed.

    Lastly, you state that there are direct subsidies (tax dollars) flowing to Amazon and that Amazon sells its products below wholesale cost. Again, you are simply ignorant of the facts of accounting and finance, as well as to the realities of our tax code AND the constitution. Amazon does not receive any direct tax subsidies from the government, so you are simply wrong. Such is the same misinformed notion that would argue parents of school children ought not be credited for what they pay in tuition to a private school because that would be construed as a “subsidy” for private schools – never mind the fact that without such a credit for what has already been paid, the parent is compelled by the heavy hand of the state to pay TWICE for education! The facts are that Amazon sells its goods and services at prices that meet the market and provide a profit – great and virtuous things! It is local retailers who, if they charge significantly higher prices, gouge the public under some idealistic, pollyanna, notion of the bygone days of quaint book sellers who are owed a living, and ought to be immune from any competition, simply because of their mere existence.

    Amazon is a fantastic company that is being unfairly and viciously attacked by the legislature of Colorado. Amazon is the victim here of this attack, and the many Colorado associates are sadly collateral damage.

    Comment by earthmom March 12, 2010 at 1:47 PM

    Thank you for your clear and understandable discussions of this issue. I value your work.

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