What Does Amazon.com's Tax Deal with California Mean?

September 29, 2011

When a consumer buys something online, in many cases that consumer is not charged sales tax by the online retailer. The U.S. Supreme Court has ruled that, to prevent disruptions to interstate commerce, a state may force only those businesses with a "substantial connection" with the state ("nexus") to collect its sales tax.

Otherwise, the Court held in its 1992 case Quill Corp. v. North Dakota, businesses would face an enormous burden of complying with numerous separate sales tax jurisdictions (over 9,600 as of 2011) with ever-changing bases and rates. Thus, only businesses with employees or property in a state usually collect a state's sales tax, even if the employees or offices are not directly involved in soliciting sales in the state.

Some states have sought to make their taxes more uniform (although not simpler) with the Streamlined Sales Tax Project, and its associated federal bill that would let them require sales tax collection from out-of-state companies, the Main Street Fairness Act. Other states have sought to assert that out-of-state companies actually are in-state if they pay referral commissions, laws known as "Amazon" laws or "click-through nexus" laws. Such laws haven't raised revenue and have led to lengthy legal challenges.

California adopted such a law in July, leading to an effort to repeal it at the ballot box, and finally a compromise hammered out between the state and Amazon.com. The state will back off from requiring collection for a year, and in return Amazon.com is going to develop a physical presence in the state with new facilities.

Does this mean that other states can get the same deal? Unlikely:

For one thing, Amazon had more of a presence in that state than simply a bunch of affiliates. The company had several wholly-owned subsidiaries in California, which made it tougher for the company to claim that it lacked a physical presence.

The other difference is that California is simply bigger, which may have made Amazon leery of cutting its ties there. Last Friday, the company said it would add 10,000 jobs in the state in coming years. "When you're California or New York across the table from an Amazon, it's a pretty big slice of the market," says Kevin Sullivan, commissioner of the Connecticut Department of Revenue Services. "We don't have the leverage that a New York has or the leverage that a California has."

That doesn't mean great things aren't possible, however. If something can be devised that simplifies state sales taxes, and makes sure that neither brick-and-mortar businesses nor online businesses face unequal obligations or compliance burdens, it could be a winner. If negotiations in the Golden State presage a deeper discussion about how we have a fair sales tax that doesn't result in states exceeding their taxing powers and harming interstate commerce, it's a good step.

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