California’s Governor Jerry Brown, formerly known as Governor Moonbeam during previous term in office, signed a budget with a provision requiring Amazon.com and other online merchants to collect sales taxes if they use affiliate marketers to help drive traffic to their web sites.
Amazon.com is fighting the new law, but has responded by notifying affiliates that their relationships with up to 25,000 affiliate marketers in the state will be canceled if the law takes effect. Amazon has canceled its affiliate relationships in Arkansas, Colorado, Illinois, New York, North Carolina and Rhode Island when similar changes were made to state tax laws.
The issue is once gain one of nexus. A nexus for a company is established when they have a physical presence in a state. That is typically a building that they own or an employee, such as a sales person. The problem with the new requirement is that affiliate marketers are not employees and are in fact independent agents who do not actually sell products. No orders are taken and no transactions take place on affiliate marketing sites. An affiliate marketing web site simply sends qualified traffic to a merchant’s web site and any sales transaction takes place there. Targeted traffic consists of people who are already looking for the product that an online merchant offers. In return, Amazon and other online merchants pay a commission on any purchases that the user makes while on the merchant’s site.
Most states require residents to pay a “use tax”, which is the equivalent of a sales tax, for all online purchases that are not taxed during the purchase transaction. However, the majority of residents are either not aware of the requirement, ignore it or refuse to pay the tax voluntarily.
Amazon’s response to each state that changes the definition of nexus to force them to collect tax on behalf of the state is to cancel all affiliate relationships in that state. The larger problem that this creates is due to the fact that when Amazon cancels the relationships in the state, over 30 other merchants follow Amazon’s lead and also cancels their affiliate relationships, rather than taking on the task of collecting the sales tax. If there are no affiliate, the new distorted definition applied by the states cannot be used to compel Amazon and other s to collect the tax.
So why don’t they simply collect the tax? For one, it lowers their competitiveness and drives more business to brick-and-mortar stores in the state. Collecting the tax does not level the playing field as the brick-and-mortar stores and the states claim. That viewpoint ignores the fact that all online merchants have shipping costs to contend with. Many, such as Amazon, are absorbing those costs for most orders that are shipped. The brick-and-mortar stores have the advantage of not charging their customers for shipping charges. Shipping costs can be a significant part of the total transaction cost.
The only way that this is going to get resolved is if either a national sales tax on online purchases is put into effect, or Amazon manages to drive this issue to the US Supreme Court. The US Supreme Court did rule on the issue in In 1992 in Quill Corp. v. North Dakota. In that ruling, the courts determined that a merchant that does not have a physical presence in a taxing jurisdiction cannot be compelled to collect taxes on behalf of that jurisdiction. That definition of nexus has been the law of the land since 1992–until some states started to change the definition of a nexus.
When the first redefinition of nexus arose with the State of New York, Amazon did try to challenge it but the case was dismissed when it hit the New York Supreme Court. The New York Appellate Court overturned the Amazon suit dismissal and both Amazon.com and Overstock.com continue to do legal battle with New York over the constitutionality of the New York tax law.
California’s new definition of nexus is being challenged by both Amazon and the performance Marketing Association, which has filed for a referendum on the Amazon tax issue. According to the information that they published, if they can collect 500,000 signatures in the next 90 days, the new law is blocked until voters can decide during the next election.