Amazon.com jettisons Illinois Associates to avoid 'Internet sales tax'

Some states have been working around the fact that Amazon.com does not have a physical presence in their state, meaning that no sales tax needs to be collected by the giant online retailer. In an attempt to close budget gaps, they have been writing laws that say any "affiliate" or Amazon Associates in their state constitutes a physical presence. In doing so, they have ultimately been shooting themselves in the foot.

Illinois recently passed such a law, and signed it into effect on Thursday. Amazon.com swung the axe very quickly, telling its associates in that state that as of April 15, the company will terminate its association with them.

In doing so, not only does the state gain nothing in the war over Internet sales tax, it loses, as those Associates will no longer collect income from Amazon.com. That means less revenue in terms of income tax for the state.

In fact, one of those about to lose his Amazon Associate status is famed movie critic Roger Ebert, who Tweeted:

Amazon will terminate my Associates account on 4/15, in order to evade fair and just Illinois taxes. I have 20 more days to make a fortune.

The statement about "fair and just" depends on your point of view. In terms of sales tax and physical presence, the Supreme Court earlier made a ruling in 1992, Quill vs. North Dakota, in which the Court ruled that out-of-state retailers cannot be required to collect sales tax on purchases sent to states where they did not have a physical presence.

The Supreme Court’s reasoning was at least partially based on the fact that, at the time the case was decided in 1992, there were over 6,000 separate sales and use tax jurisdictions in the United States (states, localities, special tax districts, etc.) and to impose a collection obligation on a remote seller would impose a crushing burden that would severely restrict interstate commerce.

The problem with innumerable separate tax jurisdictions has not gone away. It should also be noted that even though retailers are not required to collect sales tax on out-of-state purchases, residents are supposed to add a so-called "use tax" into their state tax return for the sales tax. Many either do not know this, or knowing that it would be impossible for the state to tell how much they owe, ignore it.

One can argue that, however, that Amazon.com, as large as it is, could handle the burden of calculating and collecting sales tax. The lack of a sales tax burden for many states, however, means that Amazon.com has a big advantage over other retailers, particularly in high sales tax states like California.

Amazon.com recently warned California that if it were to enact a similar measure to Illinois', the company would jettison its 10,000 Associates there.