The Great Recession that started in 2007 caused the largest collapse in state revenues on record. Since bottoming out in 2010, revenues have begun to grow again, but states are still far from a full recovery. As of the third quarter of 2011, state revenues remained 7 percent below pre-recession levels, and are not growing fast enough to recover anytime soon.
Experts believe that if every state imposed and collected a tax on all online sales, including electronic retail sales and electronic business to business sales, the states would cumulatively receive an additional $10 billion in revenues each year. This could potentially reduce the average state's budget deficit by 17%. Other estimates show that annual national losses of state and local sales tax on electronic retail sales could reach $11.4 billion by this year.
The depressed state of the economy has forced states to look for alternative ways to boost revenue and decrease annual operating deficits. One method that states are considering is the increased collection of sales and use tax. States are trying to eliminate the inability to collect sales or use tax on electronic retail sales from out-of-state retailers. States are contemplating, and some states have enacted, new legislation which broadens the definition of who is subject to collection and remittance of tax under applicable laws so as to allow states to increase collection of sales tax on electronic retail. Hence, the Amazon Law.
The background against which New York adopted its Amazon law is well known: In the face of growing retail sales on the Internet and declining tax receipts, state tax collectors have understandably turned their attention to the revenue being lost from sales by out-of-state retailers to the residents of their states. As a matter of law, those who purchase goods from out-of-state firms via the Internet or mail order owe their states of residence use tax on their purchases in lieu of sales tax. In practice, it is often difficult for the states to collect use taxes from Internet and mail-order purchasers. The seller in those transactions is frequently located out of state and consequently avoids the obligation to collect tax on its sales. While the customer is legally obligated to self-report and pay to his state of residence use tax on his Internet and mail-order purchases, enforcing that obligation is usually impractical since the state tax authorities lack the ability to identify those purchases.
Efforts are under way to enact federal legislation that would enable the states to demand that out-of-state sellers collect and remit use tax on their Internet and mail-order sales. So far, however, those efforts have been futile.
In 2008, New York enacted legislation requiring out-of-state internet retailers to collect and remit state sales tax on tangible personal property or services sold through links on websites owned by state residents.The legislation appeared to target popular internet retailers, including Amazon.com and Overstock.com, that previously did not collect New York sales tax from their New York customers. This was the first “Amazon law.”
The law requires out-of-state sellers operating “affiliate programs” in the state to register to collect and remit sales tax. It provides that a “vendor” includes a person making sales of tangible personal property or services to New York customers through an agreement with a New York resident for a commission or other consideration, by which the resident directly or indirectly refers potential customers, by a link on an internet website, to the seller, if the cumulative gross receipts from such sales exceed $10,000 per year. In other words, potential customers reach the out-of-state retailer’s website by clicking on a link on the in-state affiliate’s website (thereby creating “click-through” nexus). The presumption of nexus may be rebutted by proof that the resident with whom the seller has an agreement did not engage in any solicitation in the state on behalf of the seller that would satisfy the nexus requirement of the U.S. Constitution.
Two days after the Amazon law was signed, Amazon.com filed suit in New York state court alleging, among other challenges, that the law violates the Commerce Clause and the Due Process and Equal Protection Clauses of the 14th Amendment, both on its face and as applied to Amazon.com, because it imposes tax collection obligations on out-of-state retailers who have no substantial nexus with New York.
The trial court ruled against Amazon.com, holding that the statute did not violate the Commerce or Due Process Clauses, both on their face and as applied, and did not violate the Equal Protection Clause as applied. Amazon.comappealed the trial court’s decision. In November 2010, the appellate court found the statute constitutional on its face. The court remanded the case for further fact-finding to determine whether the statute was unconstitutionally applied to Amazon.com under the Commerce and Due Process Clauses.
As convoluted as this situation is, it appears the trend to expand sales tax nexus standards to include remote out-of-state retailers is set to continue on its current upward trajectory. The 2011 legislative season saw more than 15 states proposing laws to expand sales tax nexus in some manner, with nine states enacting those laws. In its July 2011 annual meeting, the Multistate Tax Commission directed its sales and use tax uniformity subcommittee to begin drafting an associate nexus statute based on New York’s Amazon law. Further, since January 1, 2012, 16 bills have been introduced in various state legislatures specifically addressing the expansion of sales and use tax nexus. Although many states are modeling their legislative language after laws enacted in New York, Oklahoma, and Colorado, there are many variations built upon these prior laws and several new nuances.
In addition, the federal government has also become much more involved. On November 30, 2011, the U.S. House Judiciary Committee held an oversight hearing on the constitutional limitations on states’ authority to collect sales taxes in e-commerce. Congress currently is considering three remote sales tax proposals: the Main Street Fairness Act (S. 1452 and H.R. 2701), the Marketplace Equity Act (H.R. 3179), and the Marketplace Fairness Act (S. 1832). What is crystal clear to me is if sales tax is applied to online transactions, the divide between online internet retail sales and traditional brick-and-mortar retail sales will become diminutive.