State Tax Trend No. 5: "Amazon" Taxes

June 25, 2012

Since the adoption of the U.S. Constitution, states have not been able to impose tax collection obligations on businesses that have no property or employees within the state.  In 2008, however, New York broke from precedent by adopting the first laws that sought state dominance over interstate commerce, says Joseph Henchman, an attorney and policy analyst at the Tax Foundation.

The law, nicknamed the "Amazon tax," imposes a tax obligation on a person or business with no physical presence in the state if it (1) enters into agreement with in-state resident involving commissions for referring potential customers; and (2) has gross receipts from sales by out-of-state companies from referrals within the state that total more than $10,000 in a 12 month period.

Since its inception in New York, the Amazon tax has seen support in other states, generating a flurry of legal action.

  • In 2009, both Rhode Island and North Carolina adopted laws identical to the original New York tax.
  • Laws were similarly passed in California and Hawaii, but they were subsequently vetoed.
  • An Illinois law that contained many of the same elements was passed but then found unconstitutional in 2012.
  • Colorado seriously considered implementing the same provision, but eventually buckled and passed a watered down version that strongly encourages companies like Amazon to collect user taxes.

The view among lawmakers in these states and others is that online sales are an easy source of revenue that states should not hesitate to exploit.  The experiences of North Carolina and Rhode Island, however, suggest strongly that this is not the case.

  • Affiliates of Amazon within those states were immediately closed down in order to eliminate the nexus of activity that justified the tax.
  • As a result, neither state has seen an increase in sales tax revenue since the passage of their respective laws.
  • Interestingly, the states have actually witnessed a revenue loss: because Amazon closed down local operations, in-state residents lost their jobs and income tax revenues decreased.

This experience signals that not only is state control over interstate commerce of dubious constitutionality, but also it is an ill-advised endeavor as a revenue generator.

Source: Joseph Henchman, "Trend #5: "Amazon" Taxes," Tax Foundation, June 11, 2012.

For text:

http://taxfoundation.org/article/trend-5-amazon-taxes

 

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