Amazon Tax Not Clicking in North Carolina

Published April 9, 2010

Seeking to close its budget shortfall last year, North Carolina followed the lead of New York and Rhode Island in passing an Internet sales tax, which many have dubbed the Amazon Tax. Colorado recently passed a similar tax, and several other states are considering some type of Internet sales tax.

Less than a year after imposing its tax on online merchants such as, Rhode Island already is considering repeal. The Ocean State has generated no additional sales tax revenue from the tax, and income tax collections have fallen.

A 2009 study by the Washington, DC-based Tax Foundation says the shortfall is a result of residents earning less income and paying less income tax because and other merchants severed their affiliate relationships rather than pay what the company calls an unconstitutional tax.

Tarheel State Follows Suit
North Carolina’s tax went into effect on January 1, and tax revenues sent to the state treasury are also falling far below expectations.

Sandra Johnson, fiscal analyst for the General Assembly’s Fiscal Research Division, said the division’s March 2010 general fund report and forecast show the state’s net sales and use tax collections, including tax law changes, are $125 million short of expectations, even though collections are up 12.2 percent over the previous year during the first 8 months of the fiscal year. Even so, baseline sales tax collections (adjusted for tax-law changes) for the first 8 months of the fiscal year are down 11 percent from last year.

It’s unclear how much revenue has been generated by the new tax, which lawmakers forecast would raise $36 million over its first two years. Thomas Beam at the North Carolina Department of Revenue said the department doesn’t track information isolating online tax revenues from other sales tax collections.

Before the state passed its Internet sales tax law, notified all its North Carolina affiliates in June 2009 it was dropping the program and announced it would no longer accept new applications from North Carolina residents.

An spokesman would not say how many affiliates the company had in North Carolina before ending the affiliate program and how much sales they generated, stating the company does not provide that information.

Losing Revenue
Internet sales tax supporters claim states lose revenue from out-of-state merchants selling products from online merchants such as but not charging or collecting the local sales tax. However, a March 2009 special report from the Tax Foundation, a Washington, D.C.-based nonprofit, nonpartisan tax research organization, reported, “the nation’s first few Amazon taxes have not produced any revenue at all, and there is some evidence of lost revenue.”

The report says these laws worsen short-term budget problems and harm economic growth.

Supreme Court Banned Practice
States adopting Internet sales laws are seeking to circumvent the 1992 U.S. Supreme Court ruling in Quill Corp. v. North Dakota, which said a “business had to be physically present in a state before that state could require the business to collect use tax on its behalf.”

Instead, lawmakers have redefined the term “nexus” used in the Court’s decision to mean out-of-state merchants are subject to collecting the sales and use taxes because they have in-state affiliates. The merchant’s Web site links generate sales, and revenues are then shared by the out-of-state merchant and local affiliate. Affiliate marketing functions essentially as an online referral.

Joseph Henchman, tax counsel and director of state projects for the Tax Foundation, said forcing out-of-state companies to collect remote taxes from more than 8,000 separate tax jurisdictions nationwide, each with different tax systems, would be not only unconstitutional but also unfair.

“Brick-and-mortar businesses collect sales tax based on where the business is located, so they need to track only one sales tax rate and base,” Henchman said. “Having to comply with the rules from so many tax jurisdictions would place online businesses at a competitive disadvantage.”

Tax Revenues Lagging Everywhere
Tax analysts attribute the slow sales tax collections to North Carolina’s double-digit unemployment, a lower rate of spending as consumers opt to pay off their credit card and other debt, and a loss of household wealth from the housing recession and the sharp drop in equity markets in late 2008.

For the first eight months of the fiscal year, net withholdings (wage and salary minus refunds) were 2.2 percent below the $5.4 billion target for the time period. Continuing weakness in employment has led analysts to lower significantly growth forecasts in the state’s personal income for 2010, predicting growth of less than 1.5 percent, far below the 2.9 percent analysts had first forecast in May.

Individuals’ Privacy Threatened
In March, eliminated its affiliate program in Colorado after it became the latest state to impose Internet sales taxes. The final bill includes a so-called “track and tax” provision that NetChoice, a coalition of trade associations, eCommerce businesses, and online consumers, says poses a threat to consumer privacy.

“The Colorado Department of Revenue will know all the vendors where residents made online or catalog purchases from remote sellers,” NetChoice said on its blog, “This would include sensitive items of a particular kind of merchandise—sex items, specialty books, items that reveal political views, etc.”

Karen McMahan ([email protected]) is a contributor to Carolina Journal, published by the John Locke Foundation in Raleigh, NC, in which this story first appeared. Reprinted with permission.