The Internet nexus sales tax debate: "Amazon Laws" vs. the Streamlined Sales Tax Project

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While the precise amount of sales tax revenue that is lost through online retailing may be in question, there is little doubt that the amounts are large enough to warrant attention by state budget directors who are looking for money. New York State's "Amazon law" found that online retailers with affiliates that pay commissions on sales generated from the Amazon site have a physical presence, known as nexus, in the state. challenged the law in court and lost, but is appealing the ruling.

To date, the outcomes for the Amazon laws are mixed, and some state governors and legislatures have been reluctant to give their support. When North Carolina and Rhode Island passed similar laws, Amazon and Overstock cancelled their affiliate programs in both states, and some online retailers indicated the move would put them out of business. The governors of California and Hawaii vetoed Amazon laws, and legislatures in Colorado and Virginia are likely to defeat proposals to tax Internet sales. But other states, including Oklahoma, are going ahead with Internet tax measures based on nexus.

A recent discussion",State Taxes on Internet Sales: Are So-called Amazon Laws the Answer?" sponsored by, examines some of the broad legal questions and political realities that states will face as they attempt to mine this revenue source. Participants also examined the merits of federal legislation, building on the Streamlined Sales Tax Project (SSTP).

The SSTP acknowledges the existing complexity of state and local sales tax regimes -- more than 7,500 in all in the U.S. -- and supports federal legislation that will simplify collection of taxes from online retailers. Over 1,000 companies are voluntarily participating in the project in the 23 states that have signed the SSTU Agreement.

Michael Mazerov,senior fellow, Center on Budget and Policy Priorities, said that the answer to the question which framed the discussion",Are Amazon laws the solution?" is an emphatic NO. Citing the Supreme Court's decision in Quill Corp. v. North Dakota, which said that physical presence was a Commerce clause requirement, not a due process requirement, the answer is federal legislation which grants states the authority to tax remote sellers. He indicated that such legislation is critical to the success of the SSTP, but Mazerov said that he saw no realistic prospect of SSTP legislation passing in Congress.

Mazerov, like the other supporters of federal legislation, leveled some criticism in hindsight, of the way the streamlined project was designed. Instead of developing structure and building acceptance, he said, proponents of the SSTP built the expectation that states would adopt the agreement and give Congress an out. That has not happened, especially in the largest sales tax states like California and New York. "There is no way you are going to get 60 senators to vote for this. Five states do not have a sales tax and those ten senators are not going to vote for any kind of sales tax legislation", he said.

But with states losing billions of dollars in revenue",We should expect [the states] will use whatever legal authority they have to chip away at the nexus issue", Mazeroff said. He added that some states where a vendor has big box stores do not collect sales tax on online sales. "New York's law may be overly conservative."

The constitutionality issue with the New York Amazon laws centers on the question of whether the affiliate programs are advertising or marketing in the state. "Amazon has a completely symbiotic marketing relationship with affiliates", Mazerov said, going into detail on aspects of what Amazon provides to the affiliate in return for commissions.

Stephen Kranz, Partner, Sutherland, Asbill & Brennan,raised questions about who had been at the table for the SSTP project, but agreed that the streamline sales tax approach was the only way to go. Kranz believes the Amazon nexus laws are unconstitutional and furthermore, are failing to deliver.

Kranz points to a long-standing potential nexus issue for catalog sales and interactive TV sales. It's a spectrum. Postcards inside magazines that a purchaser may mail in to order a product may have codes that give a payment of the sales to the magazine for every sale. "Does that create nexus?" he asked.

Scott Peterson, executive director, Streamlined Sales Tax Governing Board, said that the debate about how states should tax sales started 80 years ago with the very first use tax during the Depression, when states first passed these laws in order to raise revenue. What is wrong with the state tax regimes, he said, is that the tax is based on physical presence. Nexus is what is wrong.

Peterson raised the question of fairness. "Is it right that the company with a sales person who travels in several states should pay?" From his perspective the right answer is the Streamlined Sales Tax approach. He described each state as a "separate kingdom", creating their own tax laws independently of each other. But, Peterson added",there is no reason why we can't do the same thing in the same way."

Peterson acknowledged that" people have lost their enthusiasm and patience for the Streamlined Sales Tax Project", saying "Even if it is the wrong approach you cannot stop people from going to court on nexus. . . . " With 20-plus percentage annual increases in online sales, he indicated that the situation is only going to get worse. He said the states will have the attitude: "It doesn't make any difference what we do to get the tax collected, we are going to collect."

George Isaacson, senior partner, Brann & Isaacson, who represents the Direct Marketing Association, was the only participant who opposed federal legislation. He cautioned participants to",Be careful what you ask for. If Congress expands state tax jurisdiction, it will come with strings attached. Businesses will come in and ask for limitations, vendor compensation."

Isaacson challenged the SSTP numbers from the University of Tennessee about lost revenue, and said "It's a self-correcting problem. A large percentage of electronic sales are business-to-business", he said",and businesses are paying." Also, he indicated that businesses may decide to pay the sales taxes for business reasons.

Isaacson said that the Direct Marketing Association had come to the table in the early days of the SSTP with ideas like one rate and one audit. He said that it was shameful the way that the SSTP had backed away from simplicity, and cited the move away from destination sourcing (the process of using the destination of a purchase as the location for applying sales tax). Peterson responded that neither was politically possible. One rate would require states with no sales tax or low taxes to increase their taxes. Destination sourcing had proved to be incredibly complicated.

An hour of questions followed the presentations, many focusing on whether nexus could be established for a variety of sales situations, prompting one speaker to say that the only group that would really raise revenue from Amazon-type laws would be the law firms representing online sellers who would challenge these laws in court.

Chris Bergen, publisher of was moderator of the discussion.

You can listen to the audiocast of this discussion.

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