"Remote Sales" Tax Battle Heating Up - Amazon Fires a Shot

The sales tax wars are getting heated up again. "World's Largest Bookseller" Amazon has "fired" its Rhode Island affiliates because RI is working on legislation which would require Amazon to collect sales tax for these affiliate sellers. According to the Providence Business News, Amazon has also cut off its relationships with affiliates in North Carolina, for the same reason. Online jeweler Blue Nile has also cut off its North Carolina affiliaites.

The Impact on U.S. States. U.S. states, which are under budgetary pressures, are looking at ways to increase revenue, and many states are trying to capture what they believe are lost sales tax revenues from online transactions (called "remote sales.") Sales taxes have been traditionally charged on transactions with companies which have a physical location in a state. But if an online seller has no physical location in that state, there has been no way for the state to collect sales taxes. It has been near impossible for individual states to monitor all Internet sales looking for in-state transactions.

Now, states are going after bigger online sellers like Amazon, asserting that if Amazon has an affiliate in, say, Rhode Island, it has a physical presence in that state and must collect sales tax. In one example I found, Minnesota is proposing similar legislation, broadening the definition of "affiliated entity" to include a "solicitor", where the retailer has an agreement with a Minnesota "resident," and where the resident refers potential customers to the retailer. The stakes are huge for the states; the Minnesota proposal estimates $60 million in potential revenue annually (based on New York's revenues from the same legislation).

The Impact on Online Retailers. Sales taxes are a huge issue for Amazon and its Associates, indeed for all online vendors, because buyers are willing to purchase from online vendors and pay shipping fees, but the buyers don't want the additional cost of sales tax. With increased shipping costs, and additional taxes, many online sellers could see their revenues fall significantly as buyers go back to "brick and mortar" stores. Online seller eBay makes this strong statement:

eBay opposes raising taxes on the Internet or its users, as well as any attempt to impose remote sales tax collection burdens on the small businesses who can least afford it. This is certainly not the time to impose a major new tax burden on Internet vendors working to implement successful new business models, nor is it wise macro-economic policy to impose what is effectively a tax increase on American consumers.

The Amazon affiliates, called Amazon Associates, sell products on Amazon, which collects a fee for processing. With Associates in many states, Amazon has been in the forefront of the fight against "remote sales." Amazon's strategy appears to be to try to pressure states into backing off from their plans to attempt to collect sales taxes on Internet sales.

What is the Background? A 1992 Supreme Court decision (affirming an earlier decision) grants sellers the right not to collect sales tax unless they have a physical presence in that state. U.S. states have been fighting for the right to collect sales taxes, and they have banded together under a Streamlined Sales Tax coalition, hoping that if all states collect sales taxes, we will in essence have a national sales tax and every state will be able to collect sales tax on every online transaction.

The Rhode Island legislation has been passed by both houses and is awaiting a decision by the governor, and other states are watching New York. We will see if the states can impose these taxes, which many consider unconstitutional. And we'll see what happens with Amazon's attempts to get states to back off.