Rhode Island Levies ‘Amazon Tax’

Published October 1, 2009

Rhode Island’s latest state budget includes an “Amazon tax” forcing out-of-state online retailers to collect the state’s 7 percent sales tax on all online purchases by Ocean State residents and remit the funds to the state treasury.

Opponents say the tax violates the Commerce Clause of the U.S. Constitution, an argument the Supreme Court upheld in the 1992 Quill v. North Dakota decision.

After the state budget passed on July 31, the Rhode Island Division of Taxation promptly sent a notice to a list of the nation’s top 100 Internet retailers explaining they must now collect the tax.

Amazon Leaves

In response to what it believes to be an unconstitutional law and to avoid paying the tax, Amazon.com promptly cut all ties to its Rhode Island affiliates. That means the state not only misses sales tax money on the foregone sales but also loses the income tax those affiliates would have paid on their income from Amazon sales.

The governors of California and Hawaii vetoed similar measures at the same time Rhode Island was imposing its tax.

“I see two basic issues in conflict,” said Shel Horowitz, author of Grassroots Marketing and six other books. “First is the unfairness of brick-and-mortar businesses having to charge a tax that online merchants escape. Second is the enormous burden on online merchants, especially small ones with little or no infrastructure, staff, and support, in potentially having to comply with tax laws in thousands of jurisdictions, often overlapping, in cities, counties, and states.

“Computing and remitting all these taxes would put many companies out of business,” Horowitz said.

Burden on Business

Maureen Riehl, vice president for government and industry relations at the National Federation of Retailers, agrees the current mixture of state, county, municipal, and other taxes makes an “Amazon tax” too unwieldy to be practical even if it weren’t barred by the Constitution.

“There’s a better solution,” Riehl said. “They need to simplify the sales tax system. They need to simplify the rates and the [collection and remittance] process. This needs to be fixed holistically. This isn’t the way to do it.”

States that go the Rhode Island route will just force online firms such as Amazon to cut their ties with local affiliates, hurting those small businesses, Riehl added.

Other States Rejected Tax

Kelly William Cobb, state affairs manager for Americans for Tax Reform and executive director of stopetaxes.com, noted the governors of California and Hawaii vetoed such taxes in large part because of the detrimental effect the new levies would have on the states’ small Internet businesses.

“The states don’t make any more money. The businesses just lose money,” Cobb said. “All a retailer has to do to avoid the tax is to sever its ties with in-state advertisers, so the states bring in no more money. It just hurts small businesses and bloggers.”

In addition, Cobb said, adding taxes in an economic downturn is always a mistake.

Phil Britt ([email protected]) writes from South Holland, Illinois.