Sorry to miss the news cycle (I bought a house, as I alluded I might in my slightly pessimistic earlier real estate postings), but I wanted to share the perfect example of the incentives and disincentives of tax laws. As predicted a while ago, California finally passed a law which stated that any out of state businesses which had affiliates in California would have to collect taxes when consumers in California purchased goods from the mother company. A few other states have already passed similar laws, nicknamed ‘Amazon Taxes’. Overstock.com and Amazon.com (disclosure: this site was technically an Amazon affiliate) immediately announced plans to cut off California affiliates.
Incentives and Disincentives
It’s hard to make a reasoned argument that tax laws don’t affect investment decisions. Sure, nationwide tax policy has more wiggle room due to the difficulty of moving to a different country – but the roots which hold companies to states are much more shallow. Note that 45 states collect sales taxes. Citizens who intend to use a product in a state are mandated to declare their purchases and pay use taxes. Amazon collects tax in 5 out of the 45 states – and maintains a physical presence in 12 of them (according to Wikipedia, again).
Lawmakers who try to pass a “Amazon Tax” are trying to work around the real problem of under-payment of use taxes by dumping the problem on Amazon’s shoulders. However, the sales tax laws in the United States are incredibly complex – a combination of state-wide rates, county rates, and even local rates in instances. Two supreme court cases seem to fall on the side of internet retailers who argue against the need to collect use taxes when they don’t have a statewide presence – National Bellas Hess v. Illinois and Quill Corp v. North Dakota. In both cases, an out of state company didn’t have to collect use taxes for purchases in a state.
Of course, there is an even easier argument against Amazon doing the heavy lifting and levying the varying taxes across all customers – and it does fall back on physical presence. Use taxes are paid to a state so the state can then extend services to its citizens. When Amazon, based in Seattle, Washington, uses services, they come from the state of Washington, not California. Amazon is simply refusing to collect tax for services it won’t be using – and it seems to be backed up by some Supreme Court precedents. Fair? Discuss in the comments!