Amazon.com threatens California Associates over proposed Web sales tax

Just as it has done previously with other states that have enacted Internet sales taxes, Amazon.com is threatening to cut off its Amazon Associates in California if that state enacts the same sort of regulations.

A 1992 Supreme Court decision, Quill vs. North Dakota, 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.

Amazon Associates place ads on their sites and gain a share of the revenue generated by those who purchase from Amazon.com through those ads. States that have enacted Internet sales taxes have been using the Amazon Associates as what Amazon.com calls Trojan horses, using their presence in the state to constitute the "physical presence" that was required by that ruling.

Amazon.com has already pulled its Associates program from the states of Colorado, North Carolina, and Rhode Island over similar laws. All those laws did, essentially, was to remove income (and thus any state income tax applicable) from those states, essentially amounting to a net loss for those states, since once the Associates were gone, Amazon.com no longer faced the prospect of sales tax.

Paul Misener, Amazon's vice president for global public policy, wrote in a letter (PDF) to the California Board of Equalization:

Amazon respectfully opposes the new tax collection schemes proposed in AB 153 (Skinner), AB 155 (Calderon), SB 234 (Hancock), and SB 655 (Steinberg), because they are either facially unconstitutional or would construct Trojan horses for functionally identical unconstitutional regulation.

Similar legislation in other states has, counterproductively, led to job and income losses and little, if any, new tax revenue.

The U.S. Supreme Court’s Quill decision prohibits a state from requiring sales tax collection by
sellers that lack physical presence in the state. AB 153, AB 155, SB 234, and SB 655 are unconstitutional because they ultimately would be used to require sellers with no physical presence in California to collect sales tax merely on the basis of contracts with California advertisers. [...]

If any of these new tax collection schemes were adopted, Amazon would be compelled to end
its advertising relationships with well over 10,000 California-based participants in the Amazon
“Associates Program.” (Participants in the Associates Program place Amazon advertisements on their websites, and then are compensated by Amazon for purchases made by visitors whom they refer to Amazon’s website. Other online sellers have similar programs and participants, which are more generally named “affiliates.”) [...]

Thus, these bills would provide no new tax revenue collected by Amazon or others who sever their relationships with California-based advertisers, and any revenue estimates should take this into account. Of course, California consumers would still be able to purchase online at www.amazon.com from Amazon’s retail business, so these bills would only deny California-based organizations and individuals the advertising fees they currently receive from out-of-state retailers and, ironically, California’s general fund could suffer a net loss in revenue as affiliates pay less income tax or move out of the state.

Amazon.com has made these same threats before, and so far, no state has really listened. It's unclear if new California governor Jerry Brown would veto any such bill to pass his desk or not; in 2010 then governor Arnold Schwarzenegger issued a veto.