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Are 'Amazon' taxes costing states money?

Trying to collect from online retailers' affiliates may backfire. Amazon has halted affiliate programs in several states.

By Kay Bell Mar 16, 2010 11:52AM

Are Amazon taxes backfiring on states


Named after the online retailer who's the main target of a growing number of state tax departments, these taxes require sales tax collection by retailers who have affiliate contracts within a state. These are deals with independent in-state residents who post Web site links to the out-of-state seller and then get a share of money based on referred sales. 


Full disclosure: I get a nominal amount now and then from the Amazon links on Don’t Mess With Taxes.


States contend this affiliate arrangement is enough of a nexus, that is, an actual state presence, to mandate the tax collection. Personally, and not just because I'm an affiliate program participant, I think it's a tenuous connection. Unfortunately, laws and definitions haven't kept up with technology and states are grasping at any income they can nowadays. 

But going after online sales affiliates might not be such a good idea, says the Tax Foundation.


A recent study by the Washington, D.C.-based group found that  the nation's first few Amazon taxes have not produced any revenue at all, and there is some evidence of lost revenue. For instance, say Tax Foundation researchers, Rhode Island has seen no additional sales tax revenue from its Amazon tax, and because Amazon subsequently halted its affiliate program in the state, Rhode Islanders are earning less income and paying less income tax.

On a recent CNBC "Closing Bell" program, Ann Holley of KPMG cites the Tax Foundation study in discussing how Amazon taxes can lead to lost state revenue.


If the Tax Foundation is right, states still are opting to learn that lesson themselves.


There currently are 16 states that have enacted or considered some form of Amazon tax: California, Colorado, Connecticut, Hawaii, Illinois, Iowa, Maryland, Minnesota, Mississippi, New Mexico, North Carolina, Rhode Island, Tennessee, Vermont, Virginia and Wisconsin.


The latest state to feel the retailer's backlash is Colorado, where Amazon has pulled its affiliates program.


It's not the first time Amazon has taken such action. And it's not alone. canceled affiliate agreements with its more than 3,400 New York contractors after that state enacted its law.


Congressional entry into e-taxes: Now Congress is considering sticking its finger in this tax and commerce pie.

Last month, the House Judiciary Subcommittee on Commercial and Administrative Law held a hearing on State Taxation: The Role of Congress in Defining Nexus.


In written testimony, the Tax Foundation advocated a national physical presence standard in this e-commerce age:

 "The Internet has seen an increased amount of commerce, but some seem to view it as a golden goose that can be squeezed without adverse effects on economic growth. It must be understood that the availability of many items in electronic commerce could be hindered if states are permitted to adopt economic nexus standards.


States will reach for as much revenue as they can, if they believe that it can benefit them even at the expense of other states and the nation as a whole. A uniform physical presence standard would restrain these efforts, maintain a level playing field for all types of businesses, and reduce costs and burdens to interstate commerce."


But Walter Hellerstein, tax professor at the University of Georgia Law School, reminded the Representatives of the difficulty of such national intervention:


"In its consideration the various proposals for limiting, expanding, or otherwise modifying the existing nexus rules embodied in judicial doctrine, the Subcommittee should keep in mind that there is no global or 'one-size-fits-all-solution' to the problems involved. Each of the problems and each of the proposed solutions arises in a different context and a solution for one problem (e.g., a 30-day physical presence rule for triggering a withholding obligation) may well be inappropriate for another problem (e.g., whether an out-of-state vendor should be required to collect a use tax on sales to in-state consumers).


"If the Subcommittee is going to recommend nexus legislation consistent with the legislation’s stated goals of 'fairness' and 'simplification,' it will need to address each problem in the particular context in which it arises with a sensitivity both to the broad tax policy concerns at issue as well as the extremely significant issue of state tax administration, which may vary from context to context."


The bottom line? For now states will continue to give Amazon taxes a try. Only if or when they find the Tax Foundation argument of diminishing tax returns is true -- or a court says they can't -- will the Amazon taxes stop.


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