California Becomes Seventh State to Adopt “Amazon” Tax on Out-of-State Online Sellers
July 1, 2011
Today we released an updated report reviewing the trend of “Amazon” tax laws, as one in California goes into effect today.
Named after their most visible target, these laws deem an out-of-state company to be an in-state company for sales tax collection purposes if the company receives commissioned referrals from in-state resident “affiliates.” The out-of-state company must then collect sales tax for the state. While 21 states have considered “Amazon” laws in the past three years, only seven have enacted them: Arkansas, California, Connecticut, Illinois, New York, North Carolina, and Rhode Island.
A more fruitful approach would be working to simplify state tax laws, to reduce the 8,000+ jurisdictions and incompatible definitions and rate categories. Instead, the California law keeps their byzantine sales tax structure and expands the scope of state taxing power not only to out-of-state businesses with affiliates, but also out-of-state businesses that sell items designed by a subsidiary in the state, and gives ambiguous authority to the state Board of Equalization to extend the tax obligation to others at its determination.
Proponents of the California claim that the law will raise $200 million per year in tax revenue, but no windfalls have been forthcoming in other states with identical laws. Use taxes and taxes that out-of-state companies are forced to collect may be politically desirable because they create the appearance that tax burdens are being shifted away from residents, but states should instead look to other revenue sources that have a track record of being effective.
Tax systems should aim to treat like transactions alike, whether the seller is remote or in-state. In arguing for “Amazon” tax laws, in-state retailers make the compelling argument that they must collect sales taxes while competing against businesses that do not have that obligation. But “Amazon” tax laws do not level that playing field. Instead, they create a three-fold unequal tax structure:
- In-state brick-and-mortar businesses must collect sales tax based on where the business is located.
- Out-of-state online businesses must collect sales tax based on where the in-state customer is located.
- In-state online businesses face no additional obligation beyond collecting sales tax on in-state sales.