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The “Amazon” Tax

In an effort to bolster its struggling economy, California has joined the ranks of many other states in implementing the “Amazon” tax. California joins New York, Colorado, Hawaii, Connecticut, Texas, Illinois, Arkansas, Rhode Island, and North Carolina in enacting a law that makes online retailers subject to sales and/or use tax obligations as a result of the activities of their in-state affiliates. The Amazon tax is named after the online retailer Amazon.com because the new tax will have the biggest impact on online retailers who sell goods and have affiliates in many states.

Amazon has responded by notifying 25,000 California-based websites that it is terminating its affiliate program in California. Amazon affiliates are compensated for advertising products for purchase through Amazon. For example, if I was an Amazon affiliate (I’m not), and this blog had links to purchase legal products through Amazon (it doesn’t), I would no longer be able to participate in the Amazon affiliate program, as I am based in California.

While California predicts that this new tax will generate $317 million in new tax revenues for the state, as well as balance the playing field for non-online businesses in the state, there have been reports that the Amazon tax has not fared well for some other states, such as North Carolina and Rhode Island, which have implemented a similar measure. One large affiliate, Fatwallet.com, left Illinois for nearby Wisconsin after Illinois adopted the Amazon tax.

In the meantime, Amazon is challenging these taxes as unconstitutional and counterproductive. The 1992 U.S. Supreme Court decision in Quill v. North Dakota, held that online sales are not subject to taxation unless the seller of the product has a physical presence within the state that is imposing the tax. This effectively allows retailers such as Amazon to sell tax-free from states where they have no physical presence, raising the question of whether having an independent affiliate in a state qualifies as the seller having a physical presence there. If so, the problem Amazon and other similar online retailers will face is that as more states begin to adopt these kinds of measures, the number of major states where affiliates can sell their products from begins to dwindle.

Should online retailers be treated differently from brick-and-mortar stores for sales tax purposes? Is California doing the right thing by trying to level the playing field? Or have the benefits of the growth of ecommerce – which has traditionally been free from sales taxes – outweighed the lost tax revenue?

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