How Amazon Laws Affect Sales Tax – Part 1

By Shane Ratigan

Proposed and actual Amazon Laws focus on the ability of states to compel sales tax collection by remote sellers. Amazon Laws do not impose any new taxes, but rather force or tend to pressure remote sellers to collect sales taxes. As the volume of Internet and virtual commerce grows rapidly, states are desperate to find an acceptable legal path to compel collection – a legal path within the bounds established by the courts. In addition, the actual and proposed state laws are somewhat diverse in their approaches, adding an additional layer of murkiness to an already cloudy area of law.

What is an Amazon Law?

The term Amazon Law does not have a clear definition. The term is really journalistic and political shorthand for any law intended to compel sales tax collection upon vendors who sell via the Internet. A legal requirement for Internet vendors to collect sales tax tests the legal concept of nexus. Nexus describes the minimum connections a vendor must have with a state before that state can compel collection of sales taxes on sales within its borders.

In plain talk, an Amazon Law is any law whose purpose is to force or pressure collection of sales taxes by a vendor who lacks “traditional” contacts with a state such as an office or depot, employees on the ground, or other physical or tangible connections.

Although these laws are associated with Amazon, Inc. in part due to the Internet vendor’s massive profile in the e-commerce space, the laws are also associated with Amazon, Inc.’s determined challenges against demands to collect sales taxes in many states. The fervor of Amazon, Inc.’s resistance to sales tax collection may have faded some in the past few years, but the company’s aggressive early stance and continuing spirited resistance really have forced a policy conversation about sales taxes and Internet sales among government and business leaders, economists and consumers.

Types of Amazon Laws

There are three types of Amazon Laws:

Click-Through Amazon Laws. New York began the push in 2009. The state legislature drafted a presumption into law that Internet advertisers who solicit customers via “click-through” advertisements establish nexus through those solicitations. The law aims squarely at so-called “affiliate advertising,” where a customer who clicks on a website ad is directed to another company’s e-commerce portal to complete a sale. The presumption that affiliate arrangements trigger nexus is rebuttable, but requires additional compliance burdens to successfully defend the rebuttal. In the subsequent thee years, Rhode Island, North Carolina, Arkansas, California, Connecticut and Georgia passed similar laws. In Pennsylvania, the Department of Revenue issued administrative guidance indicating the same approach. California repealed its law three months after it was passed.

Related Entity Amazon Laws. Another legislative strategy is to broadly define the types of subsidiaries or other related entities that trigger nexus for out of state companies. Laws of this nature aim directly at entity isolation techniques employed by vendors wishing to avoid the complications of nexus. Legal separation from in-state activities, or entity isolation, sidesteps traditional elements of nexus such as property ownership or existence of employees. New York, Colorado, Oklahoma, Arkansas, California, Illinois, South Dakota and Texas expanded the types and categories of related entities that trigger nexus in their states with these types of laws. California repealed its version three months after the law was passed.

Consumer Notification Amazon Laws. A third and final legislative strategy requires Internet vendors to provide retail customers an accurate use tax obligation calculation for each sale. The notification laws also share a state reporting component where vendors may be required to report in-state sales to revenue authorities annually. Oklahoma, Colorado and South Dakota put these types of notification laws on their books. The Colorado law was successfully challenged in U.S. District Court with an appeal pending in the 10th Circuit.

In part 2 of this two-part series, we will explore the effect Amazon Laws have on the remote seller and collection of sales taxes and a look into the future of Amazon Laws.

 

Shane Ratigan

About the Author

Shane Ratigan, JD, LLM, is content compliance manager working in sales tax law and sales tax compliance with Avalara, a Software-as a-Service end-to-end sales tax solution for businesses of all sizes. Contact him at [email protected]

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