Eight States Consider Adopting New York’s Problematic “Amazon Nexus” Law

April 22, 2009

California, Connecticut, Hawaii, Illinois, Minnesota, North Carolina, Tennessee, and Wisconsin are considering following New York’s lead in adopting an “Amazon nexus” law that requires out-of-state businesses to collect taxes for the state if they have at least $10,000 in contracts with in-state affiliates.

Generally, a state can turn a business into a tax collector only if the business has employees or property within the state. For example, Internet retailer Amazon.com sells merchandise nationwide but has employees and property in only a few states. Only those states can constitutionally force Amazon to collect taxes from third parties, such as sales taxes on purchases. (Elsewhere, states can and do impose use taxes on the purchase of goods and services where sales tax has not been paid.)

Why? Three reasons. First, states cannot extend their taxing power past geographic lines or else individuals and businesses risk multiple taxation and ambiguous rules. Second, there are over 8000 sales tax jurisdictions in the United States, each with their different and ever-changing rates, bases, and rules, and strict compliance with them is very difficult. Third, sales taxes are taxes on consumption and should therefore be paid by the user where the product is consumed. Changing the rules so that taxes are imposed instead where the product is sold undermines this justification of sales taxes.

New York’s interesting innovation is its claim that Amazon.com can be burdened with a tax collection obligation because it has signed contracts with New York affiliates. It rests on slender logic and has troubling implications for Internet-based businesses. Amazon.com and Overstock.com have challenged the law on commerce clause and due process grounds. The New York Supreme Court (which is a trial level court in New York) upheld the law in January, leading to confusion in many states as to the importance of the ruling. The case is currently on appeal.

States are scrambling to find easy revenue nowadays, but adopting a nexus law is anything but easy revenue. To the extent such laws extend a state’s taxing power beyond its borders to hit companies with no property or employees in the state, it raises serious constitutional questions. The litigation will be tied up for some time, and adopting such a law sends the message that a state is looking to fleece out-of-state businesses and harm interstate commerce instead of making the hard decisions about cutting spending for or raising taxes on its own residents to pay for the programs they want.

(Disclosure: Until recently I owned several shares of Amazon.com stock.)

(Hat tip: Tax Analysts articles by John Buhl)

Related Articles