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New York “Amazon Tax” Presents Policy and Legal Problems

3 min readBy: Joseph Bishop-Henchman

As part of the budget signed by Governor Paterson this month, New York has adopted the “Amazon tax”-a requirement that any out-of-state online retailer 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. on purchases if the business does at least $10,000 worth of business with in-state affiliates. New York officials estimate the 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. will bring in $50 million per year.

New York’s move is just the latest in a string of state efforts to abandon the physical presence rule of taxing out-of-state businesses. In 1992, the U.S. Supreme Court reaffirmed the rule in the Quill v. North Dakota case, holding that a state could not impose sales tax collection obligations on a company, unless the company has either property or employees in the state. Amazon has neither in New York.

As we mention so often, politicians are tempted to increase state spending not by asking constituents to fund the programs they want, but instead by shifting burdens to hidden taxes on (faceless, non-voting) out-of-state businesses. Such moves add to complexity, make the tax system less neutral, and lead to more government than citizens are willing to pay for. In this case, beyond being poor tax policy, New York’s “Amazon tax” may also violate the U.S. Constitution’s Commerce Clause.

Some local retailers applaud these of raids on out-of-state business:

“This is a first step — but a critical one — in our ongoing battle to level the sales tax playing field between New York retailers and the out-of-state Internet giants that have, for years, capitalized on an unfair and unintended competitive advantage driven solely by tax policy,” James Sherin, president CEO of the Retail Council New York, said in a statement reacting to the bill’s passage.

Far from creating a level playing field, New York’s new law and other efforts to abandon the physical presence rule (California has a pending bill, A.B. 1840) actually move away from a level playing field. If every state did what New York did, online retailers would have to keep track of the different rates and bases of the 7,400+ sales taxing jurisdictions in the United States and all the income tax systems. We here at the Tax Foundation have a lot of researchers and subscriptions trying to do that, and it’d be quite burdensome for small online retailers to tackle that task. Meanwhile, brick-and-mortar retailers need only keep track of one sales tax rate and base.

Many states are hoping that the Streamlined Sales Tax Project, by simplifying state sales taxes, will paper over this fundamental inequity by making compliance easy. (Hard to believe since their stretch goal is to limit the 7,400+ sales tax jurisdictions by nine-digit zip codes, of which there are 38,547,080.) But the SSTP did criticize New York’s move for the burdensome mistake that it is:

“They’re going to struggle to get what they want,” [Scott Peterson, executive director of the Streamlined Sales Tax Governing Board] said of the New York law… New York would get “greater results” and receive a “more positive reaction from the business community” by instead joining the Streamlined Sales and Use Tax Agreement, Peterson said. Peterson added that with the new law, the state will likely end up in court.

Yours truly made a push for neutral tax systems that don’t discriminate against online retailers in a comprehensive Internet News article by Kenneth Corbin:

“Brick-and-mortar retailers will have to keep track of just one tax law at a time, while online retailers will have to keep up with 7,400,” he said. “A neutral tax system would have all retailers collect tax on one standard or the other.”

More on the physical presence rule here, here, and here.