Statement of Brent Mead Before the Maryland House Ways and Means Committee




Statement of Brent Mead
State Government Affairs Manager
National Taxpayers Union
Before the Maryland House Ways and Means Committee

March 19, 2012

      Chairwoman Ellis Hixson and Members of the Committee, my name is Brent Mead and I am the State Government Affairs Manager for the National Taxpayers Union (NTU), the nation’s oldest and largest non-profit advocate for overburdened taxpayers. I am honored to submit these remarks today on behalf of NTU’s 7,100 members in Maryland.

      NTU previously wrote the Maryland General Assembly urging a vote against Senate Bill 523. NTU staunchly opposes any effort to raise taxes on overburdened Maryland residents. In 2008, Maryland passed the largest tax increase in state history. Now, a scant four years later, Old Line State taxpayers are facing yet another devastating tax increase proposal because their legislators are unable to sufficiently restrain expenditure growth. While NTU objects to numerous provisions in SB 523, I want to devote particular attention to one aspect of the legislation that would create an affiliate-nexus style tax scheme in the state.

      Maryland has twice (in 2009 and 2010) considered such changes, which would establish a taxable presence for out-of-state retailers with advertising relationships in the state (popularly known as the “Amazon tax”). NTU has maintained, and will continue to voice, serious concerns with such proposals. An Amazon tax scheme would expand Maryland’s taxing authority beyond its well-defined constitutional limits, worsen the considerable competitiveness issues surrounding the existing tax structure, and fail to raise significant sums of revenue. Rather than queue up another attempt at unconstitutional and punitive tax policy, Maryland should seek to implement broad-based tax reform, which would bring more stability to the state’s finances and encourage economic growth.    

A. Affiliate Taxes Are Unconstitutional Exercises of Taxing Authority

      The U.S. Supreme Court has ruled that only retailers with a physical presence, or “nexus” to a state, such as a storefront, outlet, or employees located in the state are obligated to collect and remit the state’s sales tax. In Quill vs. North Dakota the Court agreed with contentions that due to the complex and numerous tax rules in the United States, retailers cannot reasonably be expected to track them all; to do so would unnecessarily impede interstate commerce.  The principles established by Quill in 1992 have held for both mail-order retailers and online retail businesses. A website link does not meet the physical presence requirement laid out in Quill.

      Not surprisingly, states that have attempted to exceed the boundaries of Quill through exotic legislative or administrative strategies have found themselves mired in a series of legal challenges. New York, which pioneered the affiliate tax concept in 2008, has been sued on this issue. Furthermore, a federal court in North Carolina rejected that state’s request for private customer information, stating such a demand “runs afoul of the First Amendment.” Maryland should avoid further pursuit of revenues down an avenue guaranteed to invite years of intensive legal challenges.

B. Amazon Taxes Fail to Post Promised Revenue Gains

      Aside from spawning legal controversies, Amazon tax laws have not yielded the promised revenues. States already collect sales and use taxes from a variety of online transactions.  Purchases often come from websites operated by large brick-and-mortar chains, such as Wal-Mart or Best Buy, which also have a valid physical presence in the state. Moreover, affiliate programs for out-of-state online retailers account for a small percentage of annual receipts.  According to the Internet Alliance, a trade group representing online retailers, such sales comprise less than 10 percent of total revenue. This makes it highly unlikely that heaping the weight of new tax rules upon online retail affiliates will meet revenue targets.

      Perhaps most instructive has been the response to similar laws in Colorado, California, and elsewhere; Amazon has simply terminated its affiliate programs in these places rather than shoulder onerous new tax and reporting obligations. Other major retailers such as,, and B&H Photo Video, have also curtailed their affiliate arrangements. Amazon stated in its letter to Colorado affiliates, “they [the reporting requirements] are clearly intended to increase the compliance burden to a point where online retailers will be induced to ‘voluntarily’ collect Colorado sales tax – a course we won’t take.”

      Notably, two of the states which were at the forefront of attempts to more heavily tax affiliates have experienced no revenue gains. North Carolina’s windfall was so small the state simply stopped tracking revenue related to the Amazon tax. Rhode Island’s scheme has actually ended up lowering overall revenue collections. When Amazon and other retailers cancelled their affiliate programs, there was virtually no one left to tax under the new law. Rhode Island did not collect any additional revenue due to its Amazon tax; indeed, when factoring in lost personal and business income when the affiliates vanished, the state has lost money.

C. Amazon Taxes Are Anti-Competitive

      Amazon taxes have the undeniable effect of closing down affiliate programs where they are implemented.  In California, the new law led to Amazon cancelling 10,000 affiliate contracts.  When other retailers are added in, 25,000 small businesses in the state will be hurt by this counter-productive policy.  Those are 25,000 businesses which will now generate less revenue for the state and provide fewer job opportunities.

      Proponents say Amazon taxes are a matter of fairness between online retailers and brick-and-mortar venues.  Simply put, these arguments are shopworn and self-serving.  Amazon taxes have the punitive effect of creating a competitive disadvantage, not solving one.  While brick-and-mortar retailers claim the existing structure is unfair, they actually have several factors in their favor, including immediate purchases and greater customer interactions. Brick-and-mortar retailers do not need to quiz their customers about where they live because they are only required to collect and remit the single sales tax rate for their physical location. And yet, this legislation would force online retailers to pester their customers for this information and potentially require collection of thousands of different tax rates if implemented nationwide.

      Finally, Amazon taxes place a heavier burden of remittance on online out-of-state retailers than brick-and-mortar retailers. According to the Tax Foundation, there are over 9,000 separate tax entities in the United States; other estimates put that figure much higher. While some compliance and recordkeeping tools exist, detailed and accurate information is hard to come by for all jurisdictions. Online retailers thus face a severe disadvantage as they must compile, and compute, the correct tax for all sales in all jurisdictions.  Brick-and-mortar stores do not face this laborious task for their in-store sales.

D. Conclusion

      Instead of revisiting or adapting an affiliate tax to the state, Maryland’s elected officials should look for ways to make its tax structure simpler, fairer, and more competitive. The state already has the fifth-highest per-capita state and local tax burden in the country and a business climate that ranks a dismal 42nd out of 50. By reducing those impediments, Maryland can attract more business and families to take root in the state, which will generate more revenue through economic growth. This process should begin by rejecting SB 523 and its damaging tax hikes.


      Brent Mead
      State Government Affairs Manager