Cengage Advantage Books: Fundamentals of Business Law 9th Edition by Roger LeRoy Miller

Exercise 8

Economic Recession Fuels the "Amazon Tax" Debate
Governments at the state and federal levels have long debated whether states should be able to collect sales taxes on online sales to in-state customers. State governments claim that their inability to tax online sales has caused them to lose billions of dollars in sales tax revenue. The issue has taken on new urgency as the states search desperately for revenue in the wake of the economic recession that began in December 2007.
Supreme Court Precedent Requires Physical Presence
In 1992, the United States Supreme Court ruled that no individual state can compel an out-of-state business that lacks a substantialphysicalpresence (such as a warehouse, office, or retail store) within that state to collect and remit state taxes. a The Court recognized that Congress has the power to pass legislation requiring out-of-state corporations to collect and remit state sales taxes, but Congress so far has chosen not to tax Internet transactions. In fact, Congress temporarily prohibited the states from taxing Internet sales, and that ban was extended until 2014. b Thus, only online retailers that also have a physical presence within a state
must collect state taxes on any Web sales made to residents of that state. (Otherwise, state residents are required to self-report their purchases and pay use taxes to the state, which rarely happens.)
New York Changed Its Definition of Physical Presence
In an effort to collect taxes on Internet sales made by out-of-state corporations, New York changed its tax laws in 2008 to redefine physical presence. Under the new law, if an online retailer pays any party within the state to solicit business for its products, that retailer has a physical presence in the state and must collect state taxes. c For example, Amazon. com, America's largest online retailer, pays thousands of associates in New York to post ads that link to Amazon's Web site. Consequently, the law requires Amazon to collect tax on any sales to New York residents. Both Amazon and Overstock.com, a Utah corporation, filed lawsuits in 2009 claiming that the new law was unconstitutional. A New York court dismissed Amazon's case, finding that the law provided a sufficient basis for requiring collection of New York taxes. As long as the seller has a substantial connection with the state, the taxes need not derive from instate activity. The court also observed that "out-of-state sellers can shield themselves from a tax-collection obligation by altogether prohibiting instate solicitation activities … on their behalf." d As a result, Amazon now collects and pays state sales taxes on shipments to New York. Overstock canceled agreements with its New York affiliates.
The "Amazon Tax"
Since then, a number of states have changed their law on physical presence in an effort to collect sales tax from online retailers and close substantial gaps in their state budgets. These new laws, which many call the "Amazon tax" because they are largely aimed at Amazon, affect all online sellers (including Overstock.com and Drugstore.com)-especially those that pay affiliates to direct traffic to their Web sites. California enacted such a law in 2011, and Amazon quickly announced that it had canceled agreements with its California affiliates. By 2012, the Amazon tax had caused Amazon to end its arrangements with affiliates in Colorado, Illinois, North Carolina, and Rhode Island as well. When California officials insisted that its law still applied to Amazon because of other contacts with the state, such as the presence of a firm that handles some of Amazon's advertising, Amazon announced that it would support a proposed ballot initiative to repeal the law in 2012.
FOR CRITICAL ANALYSIS
Should the fact that an out-of-state corporation pays affiliates in a state to direct consumers to its Web site be sufficient to require the corporation to collect taxes on Web sales to state residents? Why or why not?