You probably remember the Internet Sales Tax that passed the U.S. Senate last year. The proposed law seemed to get stranded in committee in the U.S. House soon after, but there is buzz that it may yet move forward.
The proposed Federal law in its current form would require all online retailers (wherever located) to collect sales tax in any state where they generate more than $1 million in sales a year.
And you may also remember the so-called nexus or Amazon sales tax laws passed in numerous states — a total of 13 by our last count. Some say the laws were an attempt to get Amazon to collect sales tax on sales made to state residents through a local affiliate marketer.
The result was that Amazon ultimately ended its relationships with its affiliates in those states, many of them small business owners, to avoid paying. The Performance Marketing Association, an affiliate advocacy organization, estimates 90,000 affiliates were affected. Some businesses either closed up shop, downsized or moved into a neighboring state without similar legislation. Others just lost an income stream to affiliates in other states.
And after all this, a decision by the Illinios Supreme Court effectively striking down Illinois’ version of the law left many wondering about the fate of any of this legislation.
States Woo Amazon in Exchange for Tax Dollars
So it’s quite an irony to hear recently that after its attempts to avoid paying sales tax for so long, the online retail giant is now willingly collecting and paying it in 19 states.
Those states currently include Arizona, California, Connecticut, Georgia, Kansas, Kentucky, Massachusetts, New Jersey, New York, North Dakota, Pennsylvania, Texas, Virginia, Washington, West Virginia and Wisconsin. And Amazon just started collecting sales tax for Tennessee, Indiana and Nevada on Jan. 1.
More states may be added to that list in the future, we hear.
So what caused this sudden change of heart? Was it another Supreme Court decision, a new more powerful state law, pressure brought to bear from its remaining affiliates? What is it that finally got Amazon to pay?
Well, it was none of these things, actually. Amazon’s claim that it owed no state sales tax was based, from the beginning, on a 1992 U.S. Supreme Court case called Quill Corp. v. North Dakota. In the case, the court found merchants are not required to collect sales tax unless they have a physical presence in the state.
Recently, states hoping to collect sales tax from Amazon have switched tactics offering to cut deals with the online retailer to get the company to locate distribution hubs within their borders.
Tax journalist Kay Bell recently explained:
“The latest real estate/tax break blockbuster came last fall when Wisconsin agreed to provide Amazon $7 million in state tax credits to get the company to build a 1-million-square-foot distribution facility in Kenosha.”
So states are providing Amazon with tax breaks to help the company do what it wants most. That is to establish distribution hubs across the country bringing Amazon closer to its same day delivery goals and squeezing out local retail competition.
There’s one further irony here. If the Internet Tax Law does finally pass, Amazon won’t even likely be affected much. By then, it will likely already be collecting much of the state sales tax the new law would require.
Instead, the regulations will likely affect smaller online retailers less equipped to deal with the added costs and complexities the law will bring.
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