Update, 1.25.2017: Amazon began collecting Louisiana tax on January 1, 2017. Also as of that date, residents of Louisiana are permitted to participate in the Associates Program.
Read the fine print in Amazon’s Associates Agreement and you’ll discover a blacklist of sorts, a small group of states whose residents are not permitted to enter the program. It reads:
“[I]f at any time following your enrollment in the Program you become a resident of Arkansas, Louisiana, Maine, Missouri, Rhode Island, or Vermont, you will become ineligible to participate in the Program, and this Operating Agreement will automatically terminate, on the date you establish residency in that state.”
No explanation is given. Associates received an email from Amazon informing them that “due to the recent enactment of tax legislation, residents of Louisiana will no longer be eligible to participate in the Program.”
Anyone not following the news may wonder at this seemingly arbitrary discrimination. But it’s not arbitrary. It’s Amazon’s reaction to those states’ click-through or affiliate nexus laws.
Legislators in Arkansas, Louisiana, Maine, Missouri, Rhode Island and Vermont have all passed laws requiring certain remote sellers (no physical presence in the state) to collect and remit state and local sales and use tax. The laws vary by state but are all are a variation of one theme: state residents who generate a certain volume of sales for an out-of-state business via links on their websites create an in-state presence and an obligation to collect sales and use tax (nexus) for that out-of-state business.
Although numerous other states have done the same, Amazon has decided the cost-benefit ratio of sales tax collection in this handful of states isn’t in the company’s favor. As a result, it has terminated its affiliate program in those states, thereby severing the ties that would create nexus. The blacklist is expanding: Missouri was added in August 2013, Vermont in January 2015, and Louisiana on April 1, 2016, when its new Internet sales tax law took effect.
Louisiana’s law was born out of the state’s need for more sales and use tax revenue, which has declined in part due to the increase of online sales. But in the game of chess that’s been playing out between states and the online behemoth, Amazon has put Louisiana in check. No sales tax revenue will be generated by Amazon or its affiliates. But the match continues for Internet retailers and states.
The National Council of State Administrators is urging states to challenge the status quo, established by a 1967 Supreme Court decision and upheld by the 1992 ruling in Quill Corp. v. North Dakota. SCOTUS ruled that the U.S. Commerce Clause requires a physical presence in a state in order for the state to tax a business.
Catalog and phone sales were thriving in 1967 and 1992, but they had nothing on the Internet sales of today. Data from the U.S. Census Bureau reveals a steady growth of online sales; year-over-year, Internet purchases are growing at a much faster than total sales. For states that rely on sales tax revenue to fund education and other essential services, this is problem.
So states like the six listed above are creating remote sales tax laws whereby Internet links create enough of a connection to the state for the state to tax certain out-of-state vendors. Alternatively, state laws tax remote sellers with affiliated in-state businesses (those that operate under a substantially name or sell a similar line of products). Some, like Alabama and South Dakota, are hoping their laws will be challenged and that the case will end up at the Supreme Court, where Quill could be overturned.
Back in 1992, the Supreme Court acknowledged that the issue of remote sales tax might be best decided by Congress. To date, federal lawmakers have refused to take it on; but earlier this year, they promised to give the matter of online sales tax collection their full attention—and a vote.
It’s a complex issue, and legislators are divided. Some feel strongly that Internet sales taxes would level the playing field between currently exempt remote retailers and Main Street businesses that have to charge sales tax. Others insist this would be both a burden on remote businesses and taxation without representation.
In the meantime, it’s a lose-lose situation for states like Arkansas, Louisiana, Maine, Missouri, Rhode Island and Vermont. Former Amazon associates have lost the affiliate fees they earned and at least a portion of their income. States are not collecting any more sales tax revenue. Everyone is waiting to see what, if anything, will happen.
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