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Why California’s Amazon Law Won’t Work—Not Without An Act Of Congress
Since then, more than a dozen other states have either passed or are planning to pass laws allowing them to collect sales taxes on Internet sales if there is a substantial presence in the state and there are paid affiliates or associates. California last week just did what New York did four years ago.
Amazon and Overstock’s reaction to the California legislature was essentially to say “It’s my football, and I am not going to play.” They terminated all affiliate relationships with marketers or other third parties in California that could create a legal nexus between them and the state to use for taxing. This approach, of course, punishes these affiliates.
Moreover, the affiliates now are threatening to establish their own virtual presence in, say Oregon or Nevada, or anywhere they can rack up a server. So the tax revenue California is looking for may slip away, and Amazon, Overstock and others may be able to delay collection.
What is worse, the new rules can sweep into their ambit much smaller E-tailers, which do thousands or tens of thousands of dollars in sales through affiliates, rather than millions or tens of millions. By aggregating the actions of marketers and affiliates into the “presence” of the out-of-state merchant, the state may be running afoul of the basic due process concerns that prevented out of state taxation in the first place.
Ultimately, it will be up to Congress to decide how it wants state sales taxes to be collected on out-of-state sales. In fact, in the Quill decision two decades ago, the Supreme Court invited Congress to step in, and assumed that it would. But Congress has not—until now.
Senate Majority Whip Dick Durbin is readying legislation that will allow states to treat Internet retailers that sell substantial amounts within a state the same as brick-and-mortar retailers. That means the E-tailers could be required to collect and remit taxes to the state as if they had a brick-and-mortar store. Durbin hopes to introduce his bill this month. Thus, even if Amazon and Overstock win, they may lose in the long run.
So this battle really isn’t about the law, about due process, about the Commerce clause or about federalism. Although Constitutional principles are being bandied about, let’s face it—E-tailers don’t want to collect taxes that will make their products more expensive, and brick-and-mortar stores don’t want to be at a competitive disadvantage.
Whether states can use affiliate marketing as a “hook” to force the payment of sales tax is only a short-term issue. We will wait for Congress to act. Or not.
If you disagree with me, I’ll see you in court, buddy. If you agree with me, however, I would love to hear from you.
-Marc
July 6th, 2011 at 12:50 pm
“…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:
http://federalistblog.us/2011/06/no_power_over_interstate_commerce.html
July 6th, 2011 at 3:11 pm
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.
July 7th, 2011 at 7:11 am
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.
July 9th, 2011 at 7:34 am
“‘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.
July 9th, 2011 at 8:36 pm
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?