Illinois Governor Pat Quinn today signed an "Amazon tax" into law, becoming the fifth state with such an Internet taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. law.
These laws, nicknamed after their most visible target, deem an out-of-state company to be an in-state taxpayer if the company receives commissioned referrals from in-state resident "affiliates." The out-of-state company then must collect sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. for the state. In a report we released last year, we outlined why the reasoning underlying these laws is constitutionally suspect:
In Quill Corp. v. North Dakota and other cases, the U.S. Supreme Court has held that states can tax interstate commerce only if the target company has a "nexus" with the state – property or employees in the state. Otherwise, the Court has held, there is a serious threat to interstate commerce as states try to impose thousands of sales taxes, each with different rules.
Further, the claims that "Amazon tax" laws raise revenue haven't proved true:
Sponsors have promised that a revenue windfall would follow enactment of an Amazon tax, but no windfalls have been forthcoming so far. This is often because online companies respond to Amazon tax law enactments by ending their affiliate programs. Rhode Island revenue-analysis office head Paul Dion stated in December 2009 that the six-month-old law had collected no revenue. An affiliate trade group believes that Rhode Island has seen less tax revenue come in, because the elimination of the affiliate program reduced income and thus income tax collections. State Treasurer Frank Caprio echoed this, saying, "The affiliate tax has hurt Rhode Island businesses and stifled their growth, as they've been shut out of some of the world's largest marketplaces, and should be repealed immediately."[…]
Finally, arguments that these laws "level the playing field" between online and brick-and-mortar business are not true:
Far from creating a level playing field, Amazon taxes move away from one. Brick-and-mortar businesses collect sales tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. d on where the business is located, so they need to track only one sales tax rate and base. Under Amazon taxes, though, out-of-state businesses are required to collect sales tax based on where the customer is located. Thus, each retailer no matter how large or small must track 8,000+ sales tax rates and bases. Further, these constantly change and (contrary to common assumptions) are not aligned with even 5-digit zip codes, let alone 9-digit zip codes.
Laws identical to the new Illinois one exist in New York (where litigation over it is ongoing), North Carolina, and Rhode Island, and have been introduced this year in Arizona, California, Hawaii, Massachusetts, Minnesota, Mississippi, New Mexico, Tennessee, Texas, and Vermont. The failure of these laws led to a second generation of "Amazon tax" laws that focus less on affiliates and more on disclosure requirements, but these have been invalidated by federal judges in Colorado and North Carolina.
More on "Amazon taxes":
- Online Sales Tax Debate, by Joseph Henchman, December 20, 2010
- New York Court Sends "Amazon Tax" Case Back for More Information, by Joseph Henchman,November 4, 2010
- ACLU Joins Fight against the North Carolina "Amazon Tax" Disclosure Demands, by Arushi Sharma, June 24, 2010
- Replies to Questions from Rep. Steve Cohen on State Taxation and Congressional Power, byJoseph Henchman, June 4, 2010
- Maryland Considers "Amazon Tax", by Joseph Henchman, March 19, 2010
- "Amazon Tax": Not a Money Maker, by Natasha Altamirano, March 11, 2010
- New Podcast: Jeffrey Reed on "Amazon" Taxes, by Natasha Altamirano, November 11, 2009