The Taxman Cometh The Taxman Cometh
December 27, 2011

In the midst of state budgetary turmoil, it is not surprising that legislators are turning to unconstitutional regulatory measures in the pursuit of a few extra tax dollars. Arkansas, Connecticut, Colorado, North Carolina, and Rhode Island are among those states that have attempted to force to collect taxes on Internet sales. The tax has become a reality in Illinois, with Gov. Quinn's signing of the "Mainstreet Fairness Act." The online retailer has challenged and resisted these attempts at taxation, shutting down its affiliates program in the aforementioned states in retaliation.

Justifying the selective elimination its affiliates, Amazon points to the economic losses that are starting to add up as a result of these regulations. In a letter sent to its affiliates in Arkansas and Connecticut on June 10 2011, the company asserted that the increased regulatory efforts are the work of “big box retailers” hoping to harm the competition:

"We opposed this new tax law because it is unconstitutional and counterproductive," Amazon said in the letter to Connecticut affiliates. "It was supported by big-box retailers, most of which are based outside Connecticut, that seek to harm the affiliate advertising programs of their competitors. Similar legislation in other states has led to job and income losses, and little, if any, new tax revenue."

In states in which the company maintains a commercial presence, like its headquarters in Seattle, Amazon has had no problem with paying taxes and complying with other regulations. This conforms to the Supreme Court’s 1992 decision in Quill v. North Dakota, which determined that internet retail companies are not required to collect taxes in states in which they have no physical presence like a warehouse or office (called a “nexus”).

Amazon has a good reason for avoiding these new tax initiatives; in states like California that are currently debating bills proposing to tax Amazon, the company could owe as much as $1.145 billion in back taxes. Texas Comptroller Susan Combs sent Amazon a bill for $269 million in back taxes, and the retailer promptly threatened to close its warehouse in the Dallas County.

This tit-for-tat interplay has been going on for a long time, but now as budgetary qualms are forcing states to look for money in previously “off-limits” territory, it seems as though the fight has resulted in a constitutional “no-man’s land,” at least in the eyes of legislators.

States are making the argument that the affiliates that Amazon does business through (entities that have a physical presence in the state) constitute a “nexus” and thus make Amazon subject to the Quill.

State and local governments, and other proponents of the tax, such as the Institute of Local Self Reliance, claim that Amazon’s exemption from taxation places local business at a “disadvantage” and “undermines state and local governments.” Undoubtedly, the closure of a factory or warehouse and the resultant unemployment of hundreds could be considered disadvantageous for the community. Additionally, adding to already high employment numbers very much constitutes an undermining of the government system.

For Amazon, the sheer bureaucracy of conforming to the individual tax codes of more than 7,000 jurisdictions across the United States could be the work of a company of its own. CEO Jeff Bezos claims that a normalization of states’ tax codes is in order, and is a staunch supporter of a streamlined sales tax initiative, which he believes will be in place in ten years or less.

Bezos’s commitment to fairness was criticized by Danny Diaz of the Alliance for Main Street Fairness, who called the CEO’s support for a federal solution “disingenuous and convoluted.” The Alliance, a coalition of primarily “brick and mortar” retailers (Wal-Mart among them) has joined those arguing for taxes, saying that its exempt status gives Amazon an unfair advantage.

Wells Fargo analysts recently compared merchandise from both Wal-Mart and Amazon, and determined that on average, Amazon’s prices were 5-6 percent lower than Wal-Mart’s before tax. If able to stay competitive after tax, Amazon could use this advantage to expand shipping and distribution centers and eliminate middle men like many of the recently dumped “affiliates.”

It’s not like Amazon has never dealt with taxes before; in Europe, where the retailer already does roughly half of its business, it faces a plethora of taxes (included the dreaded VAT) and has remained an international retail powerhouse.

What needs to stop is the discord between Amazon and state and local governments; threats of exorbitant back taxes and factory closures are waste of public time and resources, not to mention bad for business and employee morale.

The idea of origin-based sourcing is becoming more and more popular—instead of trying to reconcile thousands of separate rates, the local sales tax of the retailer applies. Such a system is hardly a novel idea. As the Illinois Policy Institute’s Kristina Rasmussen points out in the DeKalb Daily Chronicle:

Illinois online retailers already use an origin-based system to calculate tax for sales shipped to in-state purchasers, which would ease any transition. But the real bonus is that states and localities will have strong incentives to keep tax rates reasonable in order to attract more retailers within their borders. And that’s good news for beleaguered consumers, especially for those who will need to stretch their dollars this holiday season and beyond.

Indeed, legislators need to choose a wiser means of alleviating budgetary distress; slapping further regulations on business and hindering growth in such a tumultuous and fragile economic climate is hardly sound economic policy.

(To read more Heartland Institute research and writing about the Amazon Tax, click here.)