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Amazon Tax Mission Creep

Mission creep: expanding a project or mission beyond its original goals, often after an initial success.

In the spring of 2008, New York passed the first successful Amazon tax law, requiring large online retailers such as Amazon and Overstock to collect sales tax. The law has since earned New York $503 million, according to Bloomberg BNA. With that kind of money at stake, it’s no surprise 17 states have passed similar laws since 2008.

Not all states have seen the same success as New York, and many Amazon affiliates have suffered as a consequence of expanding Amazon tax laws. Nevertheless the creep continues, and it is unclear when it will stop.

The new face of sales tax

Businesses traditionally collect sales tax in states where they have some sort of physical presence. Here’s the rationale: sales tax revenue helps pay for state services (think police and fire) and infrastructure (think roads). Companies located in a state should financially contribute to those services, just as residents do, because they benefit from them. This is why Amazon collects sales tax in states where it has a physical presence like an office, warehouse, or distribution center.

It’s less clear if a company should have the obligation to collect tax in a state when it has a connection with the state but no actual physical presence there. Does having a traveling salesman in a state create the obligation to collect tax? Typically, yes, but sometimes it depends how often said salesman visits. Does a direct mailing to potential customers create the obligation to collect? Sometimes yes, sometimes no. Does a link to a business from a website hosted by an individual or business located in the state create the obligation to collect tax?

Ah, now it gets interesting.

As internet businesses have blossomed and sales in those businesses have bloomed, states have become interested in capturing sales tax revenue from internet sales made by out-of-state retailers. Affiliate tax laws, such as the ones Amazon complies with in New York and avoids in Rhode Island, are the best chance states have right now of obtaining some of that revenue.

In a nutshell, an affiliate tax law can create nexus (a tax obligation) for a company that is connected to a state through in-state affiliates. Sometimes this connection can be as simple as a link on a website that refers customers to the out-of-state business. These laws vary from state to state but typically have financial requirements. For example, an out-of-state retailer must make a certain amount of money from in-state referrals during a given period of time in order for sales tax collection to be imposed.

Amazon tax timeline: agreements and axed-affiliates

Amazon has taken a Jekyll and Hyde approach to online sales tax laws: it sometimes severs ties to in-state affiliates to avoid collecting tax, and it sometimes agrees to collect after cutting a deal with the state.

Mr. Hyde

Rhode Island passed an Amazon tax law in 2009, with disastrous consequences for Rhode Island’s Amazon affiliates: the company severed all ties with the state in order to avoid the tax.

Colorado tried a slightly different tactic in 2010, sidling up to Amazon and asking the retailer to share information with the Department of Revenue, rather than actually collect Colorado sales tax. It didn’t work–the retailer axed its Colorado affiliates and the Colorado law ended up in court. Three years later, however, it looks like that law might stand.

When affiliate nexus laws were passed in Illinois in 2011, Amazon axed its affiliates and the law ended up in court. Last October, the Illinois Supreme Court ruled the Illinois Amazon tax was discriminatory against electronic commerce, and in November 2013, Amazon affiliates in Illinois were reinstated. Amazon does not currently collect sales tax in Illinois.

As of this writing, Amazon does not allow affiliates in the following states:

  • Arkansas,
  • Colorado,
  • Maine,
  • Minnesota,
  • Missouri, and
  • Rhode Island.

North Carolina is also on that list, but that will presumably change since Amazon started collecting sales tax there on February 1, 2014.

Dr. Jekyll

Amazon currently collects sales tax in Washington State, where it is headquartered. It also collects in Kansas, Kentucky, North Dakota and the following states (with year enacted):

What gives?

There has been a lot of dispute around Amazon and sales tax. The online retail giant has let its displeasure with affiliate nexus and similar laws be known. Yet curiously, it has also lobbied for the Marketplace Fairness Act of 2013, federal legislation that would grant states the right to slap a sales tax collection obligation on certain remote retailers. Retailers like Amazon (and its competitors).

Unless federal lawmakers or the United States Supreme Court step up to the plate and make a change at the federal level, states will likely continue to consider Amazon tax laws. Amazon will continue to respond as it sees fit. It may turn a cold shoulder, as with Missouri, Minnesota, and Maine, or be warm, as with New Jersey, Virginia, and Massachusetts.

Still creeping

To date, three states have introduced Amazon tax legislation this year: Hawaii, Indiana, and South Carolina. Amazon actually began collecting sales tax in Indiana at the start of 2014, and it is scheduled to start in South Carolina in 2016. As with existing Amazon laws, the proposed legislation in these states would likely extend sales tax collection to many other remote retailers besides Amazon that are currently not required to collect.

Is your business prepared for these types of sales tax changes?

Sales tax rates, rules, and regulations change frequently. Although we hope you'll find this information helpful, this blog is for informational purposes only and does not provide legal or tax advice.
Avalara Author
Gail Cole
Avalara Author Gail Cole
Gail Cole began researching and writing about sales tax for Avalara in 2012 and has been fascinated with it ever since. She has a penchant for uncovering unusual tax facts, and endeavors to make complex sales tax laws more digestible for both experts and laypeople.