As you probably know, sales tax is typically not assessed on internet sales crossing state lines. Under the Supreme Court’s Commerce Clause doctrine, states are generally prohibited from requiring out-of-state retailers from collecting “use” taxes for sales to in-state residents. However, an exception exists where such retailers have a sales force, plant, or office in the state. While it is not entirely settled whether independent contractor “affiliates” such as those Amazon uses establish the requisite “nexus” permitting a state to mandate retailers to collect use taxes, California is giving it a go:
Gov. Jerry Brown has signed into law California’s tax on Internet sales through affiliate advertising which will immediately cut small-business website revenue 20% to 30%, experts say.
The bill, AB 28X, takes effect immediately. The state Board of Equalization says the tax will raise $200 million a year, but critics claim it will raise nothing because online retailers will end their affiliate programs rather than collect the tax.
Amazon is already shutting down its California affiliates. Amazon attempted to fight the state of New York on the constitutionality of a similar use tax a few years back, but lost in the trial court because of the existence of New York affiliates. Governor Jerry Brown and Senator Hancock and Assemblyman Skinner obviously knew this was coming. This is a power play.
Here’s an interesting comment from a small Amazon affiliate about the practical impossibility of collecting use taxes:
I am a tiny online retailer. In order to collect sales taxes for jurisdictions outside of my own, I would have to do the following:
1. Setup an account with each and every state, county, and municipal jurisdiction with a sales tax.
2. Report sales taxes monthly or quarterly with each and every jurisdiction even if my sales in that jurisdiction during the reporting period is $0.
3. Determine all of the jurisdictions that every shipping address I have is contained in.
4. Understand all of the tax rates and exemptions and exemptions to the exemptions.
5. Keep up with the changes in tax rates, exemptions, exemptions to the exemptions, and arbitrary boundaries that form jurisdictions for each and every jurisdiction in the country.
This is effectively impossible.
Similarly, as Patrick Byrne, Overstock.com’s CEO observes:
There are 7,200 taxing jurisdictions in the United States. In some jurisdictions, cotton candy is candy. In some, cotton candy is food, and food and candy have different tax rates. A company in Utah, for example, cannot sit here and know the right way to tax every possible product in Paducah, Kentucky. It is impossible.
Some legal analysis on this story is in the works.