My Take on the “Amazon Tax” by Ford Davies

The root of the California “Amazon Tax” is a US Supreme Court decision Quill vs. North Dakota.  In that decision the court ruled that if a business had a physical presence in a state that State could collect sales taxes.  This was construed to be an actual physical presence such as a building, etc.  You can look up the full decision on Wikipedia.  The court’s reasoning was that if there was no physical presence then this was an issue subject to the Commerce Clause of the Constitution rather than due process.

The Commerce Clause gives the federal government power to regulate interstate commerce and prohibits certain state actions, such as applying duties, that interfere with trade among the states. In National Bellas Hess, Inc. v. Department of Revenue of Illinois, 386 US 753 (1967), it was held that a business whose only contacts with the taxing state are by mail or by common carrier lacks the “substantial nexus” required under the Dormant Commerce Clause” [i]

The Supreme Court’s reasoning was at least partially based on the fact that, at the time the case was decided in 1992, there were over 6,000 separate sales and use tax jurisdictions in the United States (states, localities, special tax districts, etc.) and to impose a collection obligation on a remote seller would impose a crushing burden that would severely restrict interstate commerce.[ii]

In other words it’s a federal issue, not a state one.  Like it or not that’s the law of the land.  So, where does this put California?  The state feels its still entitled to the sales tax.  In order to collect the sales tax they have to establish that Amazon has a physical presence in the state.  This is a tough sell but they did the following:

  • They said that if a website based in California had a link to Amazon marketing a product (such as a book) it was enough to establish a physical presence.  These types of entities are called “affiliates” and they typically use a device called “click through”.  This reasoning is a stretch.  Although the Supreme Court used the example of mail or common carrier and made no mention of the internet there is still a similarity.  This part of the decision alone leaves California vulnerable to court challenge.
  • The Kindle, which is Amazon’s E-reader, is manufactured in Cupertino.  Even though this is done by a separate and private company (Lab126 Inc.) California argued that this also established a physical presence for Amazon.

Whether you agree with Amazon’s position or not they do have a Supreme Court decision behind them.

The practical effect of this in California has been negative.  Amazon immediately cancelled its affiliate program in CA to remove the appearance of a physical presence.  I’m sure they’re going to argue that the manufacturer of the Kindle isn’t an affiliate.  This doesn’t mean that Amazon can’t sell in California; it just keeps them from collecting the sales tax.   According to California could lose up to 25,000 jobs as a result of this tax.  This could also result in a net loss of revenue further hurting the budget.

The petition to gather signatures for the ballot seeks to remedy this situation for California.  The ultimate solution will be a federal one.  Since this comes under the commerce clause some legislation will be needed.

Brick and mortar stores such as Wal-Mart and Target make a good argument in favor of Amazon tax.  They have large online sales operations that sell a lot of the same things Amazon does.  They’re unable to escape the taxes because of their physical presence.  This gives Amazon a huge advantage.  In this case, however, California is using weak and specious reasoning to get around the decision of the Supreme Court.

If this initiative to repeal the Amazon Tax makes it to the ballot and passes it will not be the end of the argument.

I feel that in the end the Amazon Tax  in California will hurt its economy and will actually cause a loss of revenue.