New Connecticut Online Sales Tax Spurs Amazon’s Promised Exodus

Published April 5, 2010 is poised to cut ties with its affiliates in Connecticut, and all the jobs that go with them, because the state legislature is threatening to pull the trigger on a tax on purchases of goods over the Internet.

House Bill 5481 declares has a physical nexus in the state, requiring one of the leading online retailers in the world to track purchases by Nutmeg State residents and collect sales taxes to remit to Connecticut’s treasury.

Proponents of the bill say it’s necessary to provide additional revenue for the state and level the playing field between brick-and-mortar and online businesses. Opponents argue the bill will cost jobs, decrease income tax revenue, and harm the state’s economy.

Amazon Calls for Tax Fairness
As when similar bills have been proposed in several states across the country—including North Carolina, Virginia and California—Amazon is threatening to terminate all of its Connecticut affiliates.

Amazon spokeswoman Mary Osako said state-by-state laws are creating a “very complex sales tax regime” and the company would only support a “simplified system, fairly applied to all business models.”

The online retailer has stated publicly many times it is not opposed to collecting sales tax on purchases made through its Web site, but it maintains individual states can’t impose taxes on what amounts to interstate commerce. That authority is given to Congress to impose nationally and uniformly by the U.S. Constitution’s Commerce Clause.

“We aren’t opposed to collecting sales tax within a constitutionally permissible system applied even-handedly,” Osako said in a published statement.

Constitutional Case
A 1992 Supreme Court ruling, Quill Corp. vs. North Dakota, prohibits states from forcing retailers without a physical presence in the state to collect sales tax on their behalf. Many states technically require local residents to pay so-called use tax on such purchases, but most taxpayers ignore those rules.

Several states, including Connecticut, have challenged that ruling by introducing bills to force online retailers to collect the tax anyway. “Amazon Tax” bills have been signed into law in New York, Rhode Island, North Carolina, and Colorado. Connecticut’s bill is identical to legislation proposed last session.

Virginia considered similar legislation this session. The senate passed the bill, SB 660, but it failed to clear the House of Delegates subcommittee in February.

California and Hawaii passed Amazon laws in 2009, but both were vetoed by their governors.

‘A Bad Idea’
Pete Sepp, vice president for policy and communications at the National Taxpayers Union in Washington, DC, says such efforts are “a bad idea.”

“Especially in an economy as fragile as this, imposing additional taxes on transactions can’t help but depress activity that could create badly needed jobs and commerce,” Sepp said.

Joseph D. Henchman, tax counsel and director of state projects at the Tax Foundation in Washington, DC, agrees and says the taxes wouldn’t bring the expected revenue anyway.

“Amazon taxes are unlikely to produce revenue in the near term,” Henchman said. “New York continues to face a lengthy legal constitutional challenge. Rhode Island has even seen a drop in income tax collections due to the law.”

Won’t Level Playing Field
Henchman also says imposing an Amazon Tax will not make the tax burden equal between online and brick-and-mortar retailers but will instead unduly punish Web-based businesses.

“Amazon taxes do not level the playing field between brick-and-mortar and Internet-based businesses, because they require Internet-based businesses to track thousands of sales tax bases and rates while brick-and-mortar businesses need to track only one,” Henchman said.

“So, that translates into brick-and-mortar businesses tracking one sales tax rate and base, while online companies would track thousands of sales rates and bases which are constantly changing,” he added.

Additionally, brick-and-mortar businesses have inherent advantages over online businesses, such as immediate purchase availability and consumer interaction, Henchman said.

Additional Burdens
The plan would create additional burdens for all retailers, says Sepp, even those with both a “real” store and one on the Web.

“Such retailers would have additional collection burdens which, despite the existence of seller discounts in many states, will take valuable time and energy away from growing their businesses,” he said.

Confusing Nexus
Henchman adds the nexus requirement may be more complex than state legislators realize.

An Amazon tax law, Henchman explains, goes after retailers that have contracts with ‘affiliates’ within a state who merely post a link to an out-of-state business on their Web site. The state where that affiliate lives, however, would now claim a share of revenues from the out-of-state business-to collect the state’s sales and use tax.

But that doesn’t mean a company such as Amazon actually has a “presence” in that state, which is required to establish legal “nexus,” Henchman says. He says even arguing the question in court can stifle commerce.

“Unconstitutionally expansive nexus standards like the Amazon tax undermine legal certainty, burden interstate commerce, and harm economic growth,” Henchman said.

Fighting Back
Sepp suggests individual affiliates should join their online retail patrons and fight back against the tax.

“Governments have every reason to persist with taxes such as these, because they have virtually unlimited legal resources,” Sepp said. “Citizens and groups and businesses don’t have this luxury, meaning it is vital that they band together and defend themselves against this predatory taxation.”

Sarah McIntosh ([email protected]) teaches constitutional law and American politics at Wichita State University in Kansas.