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Colorado ‘Amazon tax’ unconstitutional?

By: Moe Lane (Diary)  |  January 28th, 2011 at 01:00 PM  | 

RESIZE: AAA

[UPDATE: 'Amazon tax laws,' for those who are wondering, represent attempts to get around a Supreme Court ruling regarding out-of-state transactions.  Residents of states who have a sales tax are theoretically expected to pay sales tax on all transactions, not just ones that take place in-state: however, vendors with out-of-state customers have long taken the position that trying to keep track of every jurisdiction's sales tax rules is an undue burden upon them.  The Supreme Court agreed, ruling that vendors are only required to track and collect sales tax on transactions for states where they had a physical presence.  This effectively means that online retailers such as Amazon.com are effectively released from the burden of collecting sales tax information.  Various Democratic state legislators - blanching at the very idea of trying to enforce individual residents from reporting their online transactions for taxation purposes - have attempted to make an end run around this ruling by writing legislation declaring in-state affiliates of online retailers as counting in terms of 'physical location:' Amazon's typical response is to immediately cancel all affiliate programs in the targeted state, thus eliminating any need for them to collect sales tax information.]

That’s the preliminary ruling by a US District Court judge, at least: he’s ruled that the law is unconstitutional on Commerce Clause grounds, and has issued a preliminary injunction to prevent the state of Colorado to enforce the disclosure rules on out-of-state vendors before the deadline.  I am not a lawyer, but the short version is that the judge ruled that the Amazon tax law violated the Commerce Clause by putting regulatory and disclosure burdens on out-of-state vendors that were not present on in-state ones; that the plaintiffs (including the Direct Marketing Association) had a valid chance to prevail in the broader case; and that until the issue was involved it would be inappropriate for the State of Colorado to collect information as per the Amazon tax law.

This is only a preliminary injunction, obviously: if this court or a higher one decides that the law is Constitutional after all it’ll be reversed.  That’s why Colorado House Majority Leader Amy Stephens (Republican, of course) is introducing legislation repealing the original law.  Colorado Senate Majority Leader John Morse (Democrat) is reflexively opposing the repeal, even though he’s sufficiently ignorant of the ruling as to apparently think that either the DMA or its members have revenue caps of $600/year.  New Governor Hickenlooper is thus in a bit of a jam; he’s facing a House that decidedly flipped last election cycle and a looming court controversy, and a remarkably uneducated set of Senate allies on the other.  That this can be fairly categorized as a ‘bit of a jam’ tells you a lot about the current ideological condition of the various state Democratic parties.

And, note: the entire point of this law was and is effectively moot anyway.  Amazon promptly pulled out of its Colorado affiliate program a year ago as soon as the law was passed, as per its standard policy.  The state of Colorado isn’t getting that sales tax money – and it isn’t getting the income tax that would normally come from transactions made through the affiliate program, which Amazon.com does report and people do pay state and federal income tax on (full disclosure: I am one of them, as I am a Maryland Amazon Affiliate)*.  It would be a good idea for state governments to stop thinking that this is 1955.  Yes, the states have had the ability in the past to collect state sales tax on effectively all transactions that involved state residents.  Yes, the Internet effectively and overwhelmingly subverts the old methods to collect that tax.  No, the states cannot force the Internet to conform to the old model.  No, it’s not particularly fair.  Yes, the states will be better off if they come up with a different revenue model that takes advantage of the new commercial paradigm.  No, that the onus is on state government to come up with said model is not particularly fair, either.  All so stipulated.

…And?

Moe Lane (crosspost)

*I assume that this was what state Senator Morse was talking about, or meant, or something.  It’s hard to tell with some of these guys.

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COMMENTS

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  • bcochran1981

    I’ve tried following this storyline here on RS and I must admit, I’m a bit lost. Help me out. Can you give a quick and dirty on what the affiliate program is and what the law seeks to do? Thanks.

  • plwinteregg

    Actually, this bill is an attempt to classify a business as having a physical presence in CO if they use an affiliate referral system that is located in CO. Affiliate referrals are a marketing tool and a form of advertising. The affiliate is not in any way part of the business, but rather will refer potential customers to the business through the use of links on their sites. In return, they receive a small fee or perhaps a cut of the business. Many affiliates are small, private businesses, often home run, and in some cases can be a simple blog.

    Illinois is the most recent state to do this, and there are already reports of a number of large referral marketing companies now moving out to other states (and taking jobs with them). The reason is that many companies, including heavy-hitters like Amazon, are now refusing to use any affiliate located in Illinois. There are actually only a few states who do this, and the results have always been the same. The large internet companies will refuse to use affiliates located in that state, companies who are large enough move out, and the small home affiliate is now out of revenue.

    This is nothing but a naked grab at more tax revenue through the use of creatively redefining what an affiliate is. Another way of looking at this is through an example of a more conventional advertising method.

    Let’s say that a company in Ohio advertises in a magazine for which the publisher is located in New Mexico. Often those publications will have a response card for which you can ask for a catalog or other contact from that company. Perhaps you might even use the contact information to directly make a purchase. In any case the parallel here would be that NM would declare that the business in Ohio has a physical presence here in NM because the transaction was the result of a referral from a NM publication.

    Sound preposterous? But that is exactly what they are doing here. This begins a slippery slope to where you could soon have all types of advertising reclassified as affiliate referrals.

    Internet/Mail Order/Interstate Commerce is in fact a lost revenue problem for many states. However, this is not the way to solve it. I own an internet company here in NM, and believe there are better ways of resolving this issue.

    In fact, because this is interstate commerce, the only way this can most likely be resolved is by the Federal government (can’t believe I just said that!). Perhaps a flat interstate sales tax redistributed back to the states?

  • http://www.notadriveby.com DF

    If this is allowed to stand in Colorado we will see a nightmare scenario of every other cash-strapped state putting laws like this into effect. Just because a state is not receiving sales tax does not mean it is getting screwed out of the benefits of that sale. Items purchased online have to be shipped, produced, packaged, website requires employees, warehouse staff, IT guys, web hosting etc. The problem is people tend to only look at one aspect of a transaction, and do not bother to account for other positive externalities a state receives.

    DF
    www.notadriveby.com

  • acat
  • romeg

    If states want revenue from the Web then they should take steps to attract web based companies to within their borders. Neither the states, local governments nor the federal government have a revenue problem. They have a SPENDING problem. Rather than constantly seeking new sources of revenues, they should find ways to eliminate programs and lower their operating costs. IL and other states where unions hold sway over so much of their economies should begin by repealing closed shop laws and any law that grants special consideration to labor unions. At the same time, Congress should begin to do the same. Unions contribute NOTHING to the economy. They are parasitic entities that only add cost to the end product or service provided by their memberships.

    Wages and salaries and benefits should be frozen to allow private enterprise to reach parity or simply cut, albeit gradually until that is achieved.

  • http://moelane.com/ Moe Lane

    …of background. My bad.

  • carolina

    Fed govt interference (taxes) will likely drive most of the ‘virtual’ businesses OUT of the country.
    There is a reason that fed govt tax revenues have been about 18% of GDP for many years (60+)…………. no matter WHAT the tax rates.

  • http://www.notadriveby.com DF

    We see what fabulous shape the Illinois economy is in. . . . . .yeah right that has worked very well.. . . .

  • USNJIMRET

    “Neither the states, local governments nor the federal government have a revenue problem. They have a SPENDING problem.”
    And, for the most part, I would have thought that the results of the most recent election would have made that damned clear at the State level, at least. But in many respects, the so called ‘mandatory’ expenditures for mostly social programs are simply smaller versions of what the Fed’s do. And our State legislatures have done a disturbingly accurate carbon copy job of over budgeting, by creating spending that exceed ANY level that reasonable taxation would fill. Further, it often seems like the only answer State law makers have to budget ‘shortfalls’ is the threat of reducing those few actual “Social programs” (Police, fire, emergency services, etc.) that are a State responsibility.
    I don’t know what the total answer is, but I do KNOW that it simply must begin with reducing, not just freezing, spending. Will that hurt some? Perhaps even a lot? Yes, of course it will. But not so much as the continuing risk that California, Illinois and Michigan, to name just three, run by constantly pushing up against the bankruptcy cliff.

  • Deskpilot

    (A) ACME Ball Bearing Co (135 employees) is a brick and mortar manufacturing company in NM.
    (B) Roller Blading Magazine (RBALLMFRcom(fictional) is trade publication w/15 employees) and is published in CO and distributed nationwide to paid subscribers.
    (C) Let the Good Times Roll (12 employees) is a brick and mortar retailer of rolerblades and skateboards in OH.
    ACME purchases an add is Roller Blading which is seen by the owner of LTGTR in OH. He likes the AMCE’s guarantee of sealed presented in the ad and logs on to ACME’s web site after deciding to purchase 1 gross of 8mm sealed bearings.
    (?) Does CO feels that since that resultant business that ACME advertised for, was provided through a print ad that originated in CO, that CO is entitled to a sales tax revenue in a transaction between an OH business and a NM business?
    (?) Does NM think that it too is entitled to a sales tax revenue from same sale?
    If the sales tax revenue item is enough to convince ACME and Roller Blading to move to an Internet sales tax free state, what’s the loss:
    ACME – 135 (65% union labor) closes its doors and moves to SC and restarts a formerly closey facctory and hire 110 non-union employees
    Roller Blading (70% union labor )does the same thing.
    Now in NM, the catering trucks don’t come to the gates to feed hungry workers, they sell less LESS local sales tax. 135 unemployed people drawing insufficient income via Unemployment compensation to trigger state income tax withholding, They have less spendable income and don’t go to see the Rockies baseball team every Thrusday nigh that they’re homet LESS local sales and hospitality tax revenue.
    SC ains 125 newly jobs that takes people OFF the unemployment line. They get the EXACT same GROSS pay as the workers in the other state do, but their weekly deposit os 5% higher because they don’t have union dues being confiscated. More order for more bearings mean more employees highered, which means more payroll tax revenue for SC.
    So, in summary, LOWER Internet taxes in SC, means more tax revenue in SC, so that SC doesn’t have to invoke a millionaires tax on those eaning over $425K/yr?
    Do I have that about right?

  • carlsbadd

    Many amazon affiliates were lost in these states. In Virginia we have a place on our tax form to report out of state purchases and pay taxes on them, it’s really a voluntary tax and I usually pay something to it.

    I am also a Amazon affiliate and many of the bigger affiliates who are making full time income in the states where Amazon has cut them lose just incorporate in Nevada.
    The proposal to cap AMA revenue to $600 a year truly shows how out of touch some politicians are, I know people that are disappointed it they don’t make that in a week and others that make that much in day.

  • The_Gadfly

    half of me wants the Senator’s proposed law to be passed thus mooting the court case, and half of me wants the case to go all the way to SCOTUS thus freeing the rest of the states with this insane law.

    It’s a very close balance too, You can argue that absent the prior catalog court ruling the laws would be constitutional so the courts are the appropriate venue in which to continue. But I think I’m going to have to award this one to the Senator on the basis that all branches of government at every level are responsible for upholding the Constitution.

  • plwinteregg

    I guess my earlier point is that from a Constitutional point of view, this is strictly a Federal issue. Any attempt by the states to resolve this on their own will certainly fail. And yes, they have a spending problem.

    This is symptomatic of the states no longer having true representation in DC (thank you 14th & 17th Amendments, Federal courts usurping state authority, etc), so they’re left to try to resolve problems for which they have no authority. But then, Progressives never pay much attention to the Constitution, anyway.

    On a similar vein, there is one state that every year sends us a notification to ‘register’ to be able to sell in that state. Of course, the whole point being that we would then collect taxes on purchases in that state. Fat chance. The first year, I called and told them that they had absolutely no authority over my business in NM, and they could pound sand. Since then, the notices have gone to file 13. We continue to do good business in that state.

    Our business is located in a tiny little remote rural town. Why? In this age of technology, it really doesn’t make much difference where we are located, and our cost of operation here is 1/4 to 1/2 what it would be in more populated areas. So although this community collects very little tax on the transactions, they now have a thriving business and employees spending money here, all funded with money from outside of the state. Not a bad deal.

    As many of you have noted, this is where the real benefit lies. Make your state/location attractive to businesses like mine and therefore make sure you are bringing in more money from outside your state than you are sending out–you are now ahead even if you aren’t collecting taxes directly on the purchases. Simple concept, really.

  • http://www.flaliberty.org scorpio0679
  • acat

    went in after Gov. Quinn (D) was narrowly re-elected. It was part of raising the state income tax.

    It’s just another example of why the best thing I can say about Gov. Quinn is that he seems to be a good grandfather.

    I expect that, if the Colorado Amazon tax is illegal, the Illinois one will be as well.

    Mew

  • highflyingconservative

    You mention that the New Governor is in a jam because the senators are uneducated.

    I believe we should be careful to use the right size brush for the right sized job. It’s is very true that we are having a legislative crisis here in Colorado but I wouldn’t go so far as to say that we have nothing but uneducated senators.

    After all we are in the process of loosing Sen. Chris Romer which can only add to the property value. Of course Chris is hoping to continue the looper’s policies as mayor of Denver as exampled by his failed legislative attempt to use tax payor money to pay for illegals to pay for secondary education. Already, Denver generally turns a blind eye to non-violent crimes by illegals under the looper’s leadership. Heck, it is widely spoken around here that Hickenlooper prefers to hire illegals in his restaurants though he seems to be selling off those assets (last I was at the Wynkoop they said he doesn’t own it anymore but you get to see his political banners hanging all over the place)

    My take is that after everything Bennet, Ridder and what Hickenlooper has already done to Denver – I better get out of this state before the whole place moves to Egypt!