Online companies have seen their sales surge despite a two year economic slump. Amazon.com alone saw worldwide sales jump nearly 30 percent in 2008 to $19 billion and to $24 billion in 2009. This upward trend only continued in 2010. Brick-and-mortar retailers did not fare as well. They, along with National Retail Federation and many state legislators have back lashed against this success claiming it is predicated on the fact that Amazon “skirts” state sales taxes. They claim Amazon under cuts in-state retailers and strips state coffers of revenue. In response, Legislatures across the country are trying to skirt Supreme Court rulings to levy taxes on companies operating outside their borders.
The most recent attempt comes from high-tax California. Assemblywoman Nancy Skinner recently re-introduced a bill (AB 153) that would require out-of-state companies with in-state advertizing affiliates to collect and remit sales taxes it supposedly owes the state. She estimates the state is being shortchanged between $250 and $500 million.
The kicker: Amazon is not doing anything wrong. According to the U.S Supreme Court ruling in Quill Corp. v. North Dakota, companies are only required to collect state sales taxes from their customers when they have a physical presence in the state (state-based factories, warehouses, employees, etc. conducting general operations). Amazon currently passes this “physical presence” nexus as it is headquartered in Seattle, Washington and has warehouses and facilities considered legal entities in Kansas, Kentucky, and North Dakota. Only residents in those states pay taxes on Amazon purchases.
Quill cited the commerce clause in its ruling, arguing that if enacted, retailers would need to track a myriad of state and local sales tax rates (about 8,000) which constantly change. Facing these new barriers to entry online companies simply end their in-state affiliate programs. For example, in July 2009 Rhode Island included an affiliate-nexus tax in its budget. Amazon.com severed formal ties with all Rhode Island businesses enrolled in the “Amazon Associates Program,” which refers buyers to Amazon.com, while giving business owners up to 15 percent of the profit. As a result, Rhode Island saw less tax revenue and less economic growth as local businesses dependent on advertizing revenue were forced to close up shop.
California will suffer the same fate if Skinner gets her way. Our colleagues at Americans for Tax Reform, Patrick Gleason and Kelly Cobb, spell out the disastrous effects this new tax will have on California’s budget, businesses, and taxpayers. They note that in 2009, 25,000 individuals and small businesses in California earned $1.6 billion from online advertising, paying $124 million in state income tax. The state will loose that money, not to mention revenue from lost payroll, business, property and sales taxes. Sacramento’s budget problems are sure to get worse.
While Amazon contests the unconstitutional imposition of state sales taxes on their customers the company does support the goal of making tax laws "simple and harmonized" and does not oppose "a constitutionally permissible national system applied even-handedly.” Similarly the retail federation and 24 other states have been seeking federal approval of a formal compact that would simplify and harmonize sales tax administration among the states to get around constitutional hurdles to taxing interstate vendors.
However, this tax collusion is an affront to American federalism and tax competition. States are attempting to abandon true federalism and jurisdictional tax competition in exchange for the power to potentially recoup a small amount of tax revenue. The federalism of the Founders fostered friction and tension between competing units of government –“laboratories of democracy” if you will. Proponents of so-called tax streamlining use colorful words like “cooperation” and “harmonization” as a guise to extend tax burdens.