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 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.


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

  1. James Says:

    “…the Constitution gives Congress and not the states the power to regulate interstate commerce. Because interstate sales “affected interstate commerce” and because sales taxes impose a burden on these sales, only Congress could regulate that behavior.”

    That is the current assumption but wrongly based. Congress was also prohibited from regulating commerce between the states under section 9 of article one. See here for a fuller explanation:

  2. Mark Rasch Says:

    James’ arguments with respect to the Commerce Clause have not really held sway with either Congress, the Supreme Court or the Executive branch since at least 1824, or since the “nullification” crisis involving South Carolina. While there has been debate about the SCOPE of Congress’ power to regulate interstate commerce (and the definition of commerce) there has been almost uniform agreement that Congress has that power. Indeed, the Quill court itself noted “Congress is now free to decide whether, when, and to what extent the States may burden interstate mail order concerns with a duty to collect use taxes.” In other words, the Federalists (including Joh Marshall) won that particular battle.

  3. Dawn Bronkema Says:

    A national sales tax sure would put an end to this debate. Instead of a state sales tax. Wouldn’t that be worse? Industry needs to find a solution, before we end up in worse state than we are today.

  4. James Says:

    “‘Congress is now free to decide whether, when, and to what extent the States may burden interstate mail order concerns with a duty to collect use taxes.’ In other words, the Federalists (including Joh Marshall) won that particular battle.”

    Marshall never said that was the power belonging to Congress nor did any of the Federalists. The court is just making bald face lies to centralize Congress’ powers. The burden that is remedied is the taxing of another states imports/exports as it “passes through.” It’s the law whether the modern court or Congress ignores it or not.

  5. Peter Says:

    One of the problems with paying sales tax over the ‘net – is the money ACTUALLY going to the State in the transaction? I don’t really believe that.

    Plus, all the local governments want a slice of the tax pie too. Where is the national clearinghouse for all the jurisdictions?

    Going on three different websites there will be three different tax amounts for the same purchase amount.

    Only A NATIONAL SALES TAX will cure the varying rates. Then, who gets the money, the states or the federal government?


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