The Amazon Tax and the Affiliates Amendment

Amazon dropped its Colorado Associates because the company reasonably expects that it is only the Associates program which may grant Colorado authority to subject the company to Colorado tax laws.

Various people have wrongly argued that, because the amended bill dropped language about “affiliates,” Amazon would have been subject to the requirements of the law with or without its Associates program. However, what matters is what the federal courts regard as establishing a relevant presence in Colorado. The federal government, not the Colorado legislature, has authority to regulate interstate commerce. I have written about this matter at greater length in my previous article, “Stop the ‘Amazon Tax!'”

Here I explore the language of Colorado’s Amazon Tax in greater detail.

Originally, the bill said that “if a retailer enters into an agreement with an affiliate,” the “retailer is deemed to be doing business in this state.” In other words, the bill explicitly claimed that affiliate programs such as Amazon Associates permit Colorado to subject such retailers to Colorado tax laws.

The amended bill drops the language about affiliates. How, then, does the bill try to subject Amazon, an out-of-state businesses, to Colorado’s tax laws?

The bill amends Colorado Statute 39-26-102(8) to state, “‘Retailer’ or ‘vender’ means a person doing business in this state, known to the trade and public as such, and selling to the user or consumer, and not for resale.”

Previously the law defined a “retailer” or “vender” as “a person doing a retail business.”

Existing statute (cited by the bill) already defines the meaning of “doing business in this state.” 39-26-102(3) states:

“Doing business in this state” means the selling, leasing, or delivering in this state, or any activity in this state in connection with the selling, leasing, or delivering in this state, of tangible personal property by a retail sale as defined in this section, for use, storage, distribution, or consumption within this state. …

By these definitions, then, Amazon is “doing business in this state” by selling and shipping stuff to Colorado consumers.

The bill further amends Statute 39-21-112 by adding a new subsection. Subsection (3.5)(b) states: “For purposes of this subsection (3.5), ‘retailer’ shall have the same meaning as set forth in section 39-26-102(8).” As we’ve seen, that is the part amended to define a “retailer” as “a person doing business in this state.”

Then the bill cashes in on these definitions in 39-21-112(3.5)(c)(I), which states, “Each retailer that does not collect Colorado sales tax shall notify Colorado purchasers that sales or use tax is due on certain purchases made from the retailer and that the state of Colorado requires the purchaser to file a sales or use tax return.”

The rest of this subsection defines the penalties for noncompliance, specifies that notifications “shall be sent separately to all Colorado purchasers by first-class mail,” and specifies that the retailer must also submit a report to the state.

In other words, the Colorado law attempts to completely obliterate any “physical presence” standard in terms of subjecting out-of-state businesses to Colorado’s tax laws. This means that the Colorado legislature is attempting to utterly disregard Article I, Section 8, of the U.S. Constitution, which grants the federal government sole authority to regulate interstate commerce.

Obviously, Amazon knows that the Colorado legislature lacks the authority to impose its tax law, absent federal approval. Whether or not the Colorado bill mentions “affiliates,” federal courts are likely to require some sort of relevant “presence” in Colorado before the state can impose its tax laws on out-of-state businesses. The reason that Amazon dropped its Associates in Colorado is precisely to remove such a “presence.”

What should we make of the bill’s section on “a controlled group of corporations?” Here’s what the bill says on that matter:

Commencing March 1, 2010, if a retailer that does not collect Colorado sales tax is part of a controlled group of corporations, and that controlled group has a component member that is a retailer with physical presence in this state, the retailer that does not collect Colorado sales tax is presumed to be doing business in this state. For purposes of subparagraph (II), “controlled group of corporations” has the same meaning as set forth in section 1563 (a) of the Federal “Internal Revenue Code of 1986”, as amended, and “component member” has the same meaning as set forth in section 1563 (b) of the [same code].

So now not only do we have to see how the new law meshes with existing Colorado statutes, but we have to see how it meshes with IRS code. (Those who wish to peruse the IRS’s delightful code may find it here.)

The text quoted above is offered by the bill as an amendment to 39-26-102, which, as we’ve seen, pertains to definitions. Notice that the new section does NOT alter the other definitions about “doing business in this state.”

Notice something else important about the new definitional language: the bill is not claiming that ONLY “a retailer that does not collect Colorado sales tax [and] is part of a controlled group” and that “has a component member that is a retailer with physical presence in this state” is “doing business in this state.” That is merely one explicitly defined example. Obviously the King Soopers down the street is also “doing business in this state.” As explained above, the bill also declares that out-of-state companies such as Amazon are “doing business in this state” when the sell and ship stuff to Coloradans.

What is exasperating about this discussion is that I only just received an email claiming, “This bill has nothing to do with affiliates, as far as I can tell. … The regulations apply to anyone from Colorado making a purchase through Amazon, regardless of whether or not they come through an affiliate.”

Such commentators apparently believe that Colorado legislators are above the U.S. constitution and may impose tax laws on out-of-state businesses at will. Amazon knows better. Amazon knows that federal courts may view the Associates program as creating a relevant “presence” in Colorado, thereby granting Colorado the authority to impose tax laws on Amazon. Therefore, Amazon removed that “presence.” (I would have the courts turn to a tight standard of “physical presence” implying a store front, but Amazon cannot count on the courts to do that.)

Somebody left a comment on my previous article wondering why Amazon did not wait to drop its Associates until the company fights “this out in the courts.”

I responded:

[I]t is to Amazon’s advantage to drop the Associates right now, rather than wait for a potential court battle to play itself out. To see why, note what Amazon says about its New York court battle, which remains in appeals:

“Effective June 1, 2008, LLC will begin collecting sales tax on items shipped to destinations within the State of New York as New York has enacted a new law requiring out-of-state sellers to collect and remit sales tax based on advertising. Amazon has filed a lawsuit challenging the constitutionality of this provision. However, as required by the law, we must still begin collecting New York sales tax beginning on that date.”

In other words, Amazon wants to make sure that it does not have to comply with Colorado’s onerous tax provisions while a potential court battle plays out.

The Amazon Tax is unjust and unconstitutional, and it should be repealed.


One thought on “The Amazon Tax and the Affiliates Amendment”

  1. Comment by Tony Donadio March 12, 2010 at 3:55 PM

    Exactly. Thank you, Ari.

    Comment by Stephen R March 12, 2010 at 5:40 PM

    Ari–I agree that the Amazon tax is a bad policy idea, but I have to differ with you a bit on your legal analysis. First, it’s well settled constitutional law that a person or entity with no physical presence in a state can still be subject to that state’s jurisdiction if they have sufficient contacts in the state (e.g., by selling goods to people within the state). Given this well-developed area of law, I don’t think the Amazon law does anything too earth shattering in that area.

    Second, sales taxes are paid by buyers, not sellers. This isn’t often appreciated when people buy things in stores because the state is able to commandeer the merchant into acting as a collection agent (something that proponents of a national sales tax should think about). If the seller happens to not be located in the state’s boundaries then the state will have a hard time arguing that it can force the seller to collect the tax. I haven’t read the actual Amazon tax bill, but based on your excerpts & descriptions it looks like the law acknowledges this twist, because it “only” requires the merchant to inform the buyer that it’s his responsibility to remit the sales tax to the state. I gather there may be penalties if the merchant doesn’t provide this notice, but this certainly isn’t the first Colorado law that has been imposed on a company like Amazon–it’s just one that Amazon has made a big deal out of publicly.

    All that said, I still think it’s a bad idea. Although, at the same time I think the tax would ultimately end up hurting those who support higher taxes, because people are going to be more outraged by having to fork over sales tax separately, in a lump sum (months after making the purchase) than they would be under the pay-as-you-go system under which most sales tax is collected now. Just like how more people would be upset by high income tax rates if they had to pay at the end of the year, rather than through wage withholding.

    Comment by Richard March 12, 2010 at 6:21 PM


    I think this is an excellent analysis.

    However, as the person who “exasperated” you with my comments about the bill, I have to say you are wrong in your assumption about my beliefs. I was speaking (I thought clearly; I guess not) about what the bill says (or doesn’t say) about affiliate programs.

    Simply stating what the bill says is not an expression of my opinion, which most definitely is not that “Colorado Legislators are above the constitution.”

    My argument all along has been that the words of the law do not target affiliates, and I think from your assessment above, we agree on that point. The only point of disagreement seems to be whether affiliates would matter in a court challenge, thereby justifying Amazon’s actions. I think Amazon’s actions are not justified, you think they are.

    I am not a lawyer; if you are, I’ll accept your interpretation. If not, let’s just agree to disagree.

    Thanks for the stimulating discussion; I’ve found it very interesting.

    Best Regards,

    Comment by Ari March 12, 2010 at 6:33 PM

    Stephen, You’re totally wrong when you claim that “it’s well settled constitutional law” that out-of-state businesses with no physical presence are already subject to state jurisdiction. (Why do you think Amazon is currently involved in a legal suit regarding its Associates “presence?”) If you doubt this, go ahead and try to find some evidence for your assertion, and feel free to write back when you’re prepared to present that evidence. Thanks, -Ari

    Comment by Jason L March 16, 2010 at 10:55 AM

    I believe that Stephen is thinking of the “minimum contacts” analysis under the Due Process Clause (usu. having to do with personal jurisdiction – whether one may be made to answer to a state court). Under that analysis there may be jurisdiction without physical presence in a state.

    The out-of-state imposition of sales and use tax, however, must both comport with due process and pass a “substantial nexus” analysis under the Commerce Clause, which does require some physical presence. See Quill Corp. v. North Dakota, 504 U.S. 298 (1992).

    Comment by Stephen R March 25, 2010 at 7:16 PM


    Sorry I didn’t see your response earlier, but Jason L was correct that I was referring to the minimum contacts test under the Due Process Clause. In addition to numerous court cases, there are entire chapters of law case books (indeed, entire books) written on this topic, so I’m not going to worry about a lack of evidence. You can start with Int’l Shoe Co. v. Washington, 326 U.S. 310 (1945) and work forward.

    Under the current due process analysis, a state can exercise jurisdiction if the defendant has sufficient minimum contacts in the state, but this doesn’t require any physical presence. Generally, solicitation of business within a state is sufficient. But much less activity can suffice. I would refer you to McGee v. Int’l. Life Ins. Co., 355 U.S. 220 (1957), where the US Supreme Court held that a California court could properly exert jurisdiction over a foreign insurer “which, except for the policy in question, had never solicited or done any insurance business in [California].” See 20 Am. Law Rep. 1201, Sec. 5. The court’s reasoning was that “it appeared that the [insurance] contract was delivered in the state, the premiums were mailed form there, and the insured was a resident of the state when he died.” Id. Additionally, merely designing and manufacturing a piece of equipment with the knowledge that it will be used in a certain state, is enough to subject one to jurisdiction of that state’s courts. E.g., Gillins v. Trotwood Corp, 682 So.2d 693 (Fla.Dist.Ct.App. 1996). See the cited A.L.R. article for numerous other examples in the same vein.

    Here’s what I’m NOT saying: I’m not saying these cases are correctly decided (or that today’s Supreme Court would reach the same conclusion). I’m also not saying there’s a clear-cut constitutional answer to the Amazon issue (“sufficient minimum contacts” is a vague enough standard that it’s frustrated lower courts since the day it was announced).

    I’m certainly not saying that there’s a clear answer in the specific area of sales and use taxation. Jason’s reference to Quill is right on point. But I think the Colorado legislature is trying to be clever (never a good idea), by emphasizing that the tax is imposed on the Colorado purchaser, not the out-of-state corporation.

    What I AM saying is that this present bill (regardless of its flaws) is not an obvious violation of the Interstate Commerce Clause. It may offend your interpretation of the ICC, and I always give your interpretations serious considerations. There may even be Supreme Court justices who would agree with you. But striking down this bill on constitutional grounds would at the least be a very close legal question; at most it would be a marked departure from current jurisprudence.

    Comment by Ari March 26, 2010 at 9:48 AM

    Stephen, My point all along has been that the state cannot unilaterally impose its rules on out-of-state businesses. The state needs federal approval. That’s largely what you’re saying as well. However, you’re wrongly assuming that “minimum contacts” justifies any and all state controls on an out-of-state business.

    You also continue to downplay the fact that Amazon is *at this moment* embroiled in a legal suit with New York over just this matter.

    The critical point in this Amazon did not just arbitrarily cut off its Colorado Associates. Rather, Amazon did so with the reasonable expectation that it is the Associates program — if anything — that gives Colorado jurisdiction to saddle Amazon with Colorado tax rules.


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