Amazon Tax

States across the US are dealing with budget shortfalls and a popular new law that seems to be spreading is what the New York Post has called the "Amazon Tax". To help understand the concept, let's start with Max who lives in California and wants to buy a new flat screen television. Max goes down to Walmart, finds the perfect TV and pulls out his credit card. Included in the purchase prices of Max's new TV is sales tax which Walmart collects and sends on to the state of California.

In fact in 2008 just over 26% of California's total state revenue came from sales tax. Suppose Max thinks better about the purchase and instead goes back home to search for televisions online. Max in fact finds the exact same TV online at Bob's television and pet emporium in El Paso Texas. Since Bob is in Texas and Max is in California, Bob does not charge Max sales tax, because Texas, like every other state, does not require companies to collect sales tax on items that are sold outside of the state.

Now technically Max is required to report his purchase to California and pay the sales tax that he would have paid if he had purchased the TV at Walmart. Of course Max is probably not going to do that, because nobody else in California or in any other state does it. California doesn't like it, but they don't really want to track down every Max who buys a TV and hound him for sales tax. The state would much rather go after Bob who sells a 100 televisions a month to California residents and make Bob pay the tax on the TVs he ships into their state. Essentially it is much easier to collect tax from Bob, plus Bob doesn't get to vote in California elections, so who cares if he's mad at state government.

The only thing Bob has going for him is a legal concept called nexus. Nexus basically means that Bob doesn't have a business presence in California, so California has no legal right to require him to collect or pay tax to their state.

What the Amazon tax is attempting to do is expand the concept of nexus. Let's say Sue promotes Bob's TV business by advertising on websites or any other way she can to get people to buy televisions from Bob. In return Bob pays Sue an affiliate commission for every TV sold within 200 miles of her home, which happens to be in

Garden Grove, California. Sue doesn't work for Bob, she is and independent business person who just promotes Bob's business. Through the Amazon tax what California wants to say is Bob has nexus in the state because of his relationship with independent business person Sue.

So far New York and Rhode Island have passed Amazon tax laws. North Carolina has said it will pass the Amazon tax, possibly as early as July. California, Connecticut, Florida, Hawaii, Illinois, Maryland, Minnesota and Tennessee have all indicated they are studying the possibility and have proposed laws in their legislatures now.

I am not sure how Amazon.com feels about having a tax named after their company, but they have certainly been playing hardball with states that pass the tax. When New York and Rhode Island passed the tax, Amazon sent letters to all of it's affiliates in those states telling them Amazon would no longer be paying commissions to or signing up affiliates in those states. According to 5Star Affiliates, the last week of June the same letters went out to North Carolina and Hawaii affiliates.
The impact for the states, at least in regards to Amazon affiliates, is not only does the state not get the sales tax, but they loose any income taxes on Amazon commissions, that were being paid by the affiliates in their state. Overstock.com is another major online retailer that has followed Amazon in cancelling affiliate programs.

Obviously Amazon is in a unique position that they could be hugely impacted by having to collect sales tax for every state and they can probably afford to push back by dropping affiliates in specific states. It is too early to tell who will win in this game of chicken. As recent as July 2 the governors of California and Hawaii both vetoed Amazon tax bills presented by their respective legislatures. It appears that right now many states, and many other companies with affiliate programs are choosing to sit on the sidelines and watch Amazon and Overstock battle it out with a few states to see which side is winning, before they jump into the war.

The tax will not impact advertising revenue earned by bloggers and websites, as it is directed at sales tax which is typically charged on products. You will be affected if your site directly markets products for out of state vendors earning commission on items sold.

Online E-tailers, EBay sellers and anyone who ships products to out of state customers be sure you keep good records of where your income is generated.