SOLUTIONS : Illinois, California, Texas

Amazonian-Size Taxes

by Kristen De Pena | July 11, 2011

Proposals to tax Internet retail sales are all the rage as states continue to look for more ways to balance their budgets in the face of revenue shortfalls. Seven states have passed the "Amazon tax," so called due to the nation's largest online retailer,, as yet another means of bringing revenue into their states. Generally, the new legislation requires online retailers to collect state sales taxes, subject to state restrictions and specific merchant obligations that create new revenue for the state. Early indications, however, indicate that the Amazon tax seems to have a deleterious effect on job creation and economic recovery. The states of California, Illinois, and Texas, illustrate this possibility.

The online tax battle began years ago: subsequent to the 1992 decision in Quill v. North Dakota, the United State Supreme Court ruled that states cannot subject and other online retailers to taxes unless those retailers have a physical presence in the state. Although the test complicates efforts by the states to tax retailers, some ambiguity exists in determining the relationship between the enforcement of the Quill decision and the Commerce Clause. Despite the arguable legal complications, many states are managing to incorporate the taxes, albeit through complicated channels using online affiliates' presence in the states.

Online retailers argue that absent these taxes, e-commerce increases the ability of consumers to obtain goods at the lowest price, thereby increasing price and product competition, providing local jobs at distribution centers, and increasing business for local affiliates. Oppositely, certain states argue that new fiscal solutions are necessary to increase their revenue and encourage more competition between online and local retailers by evening the playing field and no longer allowing online retailers to undercut physically present businesses. Nonetheless, the states' "solution" may be an erroneous one for two reasons: first, it is unclear whether states will earn revenue from the tax and second, large online retailers (Amazon and Overstock) are simply terminating their relationships with states requiring the taxes, no longer providing any competition to local business.

In Illinois, for example, as Governor Quinn signed the "Mainstreet Fairness Act" imposing an Amazon tax, online retailers informed the state that they intend to stop doing business there. About one year ago, online retailers demonstrated their commitment to end business in Colorado after they passed a similar tax. Still, Illinois projects $150 million in revenue in the face of evidence from other states, namely Rhode Island, whose Department of Revenue reports that the state collected no revenue from their Amazon tax passed nearly two years ago. Similarly, California's Amazon tax requires sales tax collection on purchases from customers referred by "in-state affiliate web sites." Despite evidence that Amazon intends to cut nearly 25,000 affiliate retailers in the state, California sponsors stand by the projections that the tax will generate $200 million in revenues.

Which states are on deck? The Texas legislature is wrestling with the idea of the Amazon tax even in the wake of the questionable gains associated with the tax.  Although Texas has yet to actually pass an Amazon Tax, it is already feeling the effects of the proposal sent to Governor Perry last week. Amazon recently announced that it would no longer continue with expansion plans for its Texas-based distribution center after being denied a temporary exemption from the new tax. Amazon officials estimate that the expansion project would have created at least 6,000 jobs and associated revenues for the Lone Star State. Instead of expanding in Texas, Amazon is opening a new facility in South Carolina, where it received the requested exemption.

Early indications from states like Rhode Island and Colorado suggest that the Amazon tax may not be the solution proponents purport it to be as a means of balancing state budgets. If Illinois and California follow in the footsteps of Rhode Island, their revenues may fall drastically short of projections. Or, as in Colorado and California, online retailers may simply drop their affiliates in each respective state as promised, costing consumers choice, competition, and jobs. It seems that tax-supporters see only the revenue projections, but ignore the many factors that could decimate those projections and close the opportunity for job creation in states such as Texas. One thing is certain, Amazon continues to successfully operate and expand in the states without the tax (opening a new distribution center in Phoenix); which states will profit?