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Why California’s Amazon Law Won’t Work—Not Without An Act Of Congress

Written by Mark Rasch
July 6th, 2011

Attorney Mark D. Rasch is the former head of the U.S. Justice Department’s computer crime unit and today serves as Director of Cybersecurity and Privacy Consulting at CSC in Virginia.

California’s new “Amazon tax” took effect on July 1 and, as in the other states that have passed similar laws, Amazon and Overstock.com have severed relations with online marketing affiliates to maintain their position that, when it comes to sales tax, “California? Never heard of it. We don’t do business in California!” And without those affiliate connections, the new law is not likely to pass Constitutional muster once it reaches the U.S Supreme Court.

But E-tailers’ legal dance to avoid paying the sales taxes that brick-and-mortar retailers collect and remit every day may be futile. Although their move might buy them a bit of time, in the end, death and (sales) taxes are inevitable. Allowing states to collect Internet taxes will literally require an act of Congress—and such a law could be introduced this month.

So why is Amazon currently exempt, and why is this happening now? Historically, out-of-state merchants have been exempt from having to collect and remit sales taxes on in-state sales unless they had a store or office in the state seeking to collect the tax. This was true for three legal reasons. First, because the out-of-state retailer had no real contacts with the taxing state, it violated “due process” to make the retailer subject to the laws (and tax laws) of the taxing state.

Second, making an out-of-state retailer (or E-tailer) collect and remit sales taxes from hundreds of possible jurisdictions was unfair when it didn’t have an office in the state. And third, having states impose taxes on out-of-state retailers that don’t have offices within the state puts an impermissible burden on interstate commerce, which is left for Congress and not the states to regulate.

In 1992, in a case called Quill v. North Dakota, the Supreme Court was asked to reexamine the ban on interstate sales taxes. North Dakota argued that its tax on catalog sales into the state should be subject to either the sales or the comparable use tax (sales taxes are collected by the merchant, use taxes imposed on the consumer). The state argued that the law should reflect changes in technology and business practice.

Companies were increasingly advertising across state lines, promoting goods and services nationally and internationally, and shipping goods anywhere. The idea that you had to have a store, a salesperson or a corporate office in a jurisdiction to be “doing business” there was, in the state’s mind, arcane. In particular, North Dakota argued that because office-products vendor Quill let its customers order products using a PC and modem, the custom-ordering software on their computers qualified as “nexus,” just like a store or salesperson would.

The Supreme Court mostly disagreed.


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