By Blair M. Anthony*
“In the U.S., the Constitution prohibits states from interfering in interstate commerce. And there was a Supreme Court case decades ago that clarified that businesses – it was mail-order at that time because the Internet did not exist – . . . could not be required to collect sales taxes in states where they didn’t have what’s called a ‘nexus.’ And that’s a very clear decision.”
– Amazon.com Founder and C.E.O. Jeff Bezos on why Amazon does not collect a sales tax in some states.
In many instances, online retailers such as Amazon.com (Amazon) have avoided charging customers a sales tax because they do not have a physical presence in some states where their products are sold. To the dismay of brick-and-mortar retailers, the physical presence sales tax requirement often gives online retailers a significant competitive advantage in terms of pricing. However, several factors are making it easier for states to induce Amazon and other online retailers to impose a sales tax on consumers. One such factor is the rise of “affiliate programs” in which third parties place links on their websites leading consumers to the websites of online retailers like Amazon. Some states have questioned whether the “affiliates” may be categorized as employees and cause the online retailer to have a physical presence in the state. Amazon founder Jeff Bezos opposes state online sales tax legislation, but supports creating a federal sales tax for online retailers. In order to avoid taxation issues in the meantime, Amazon and other online retailers have built distribution centers and negotiated tax settlements with some state politicians. To date, Amazon imposes a sales tax on purchases made in twenty of the states and in the future may impose a sales tax in more states. However, competing judicial interpretations between the highest courts in New York and Illinois illustrate the ongoing conflict between Amazon and states regarding the physical presence requirement.
II. Affiliate Commerce Programs Spark E-Commerce Taxation and Litigation
Amazon has developed a program, known as “Amazon Associates,” which allows third party websites to advertise Amazon.com in exchange for a commission if their advertisement yields a purchase on Amazon. Similarly, Overstock.com (Overstock), another online retailer, has an affiliate program through which third party websites are paid for links on their websites that yield sales on Overstock.
A. New York Victorious in Assertion that Affiliate Program Constitutes Physical Presence
Cash-strapped states looking for a way to earn additional tax revenue have asserted that affiliate programs serve as a physical presence within their state. In Amazon.com, LLC v. New York State Department of Taxation & Finance, Amazon and Overstock sought injunctive relief from a New York statute that imposed a duty on out-of-state retailers to collect sales and use tax when they utilized in-state residents to solicit business through Internet websites. In reaching its decision, the New York Supreme Court reasoned that “while it must constitute more than a ‘slight presence,’ [the physical presence requirement of Quill Corp.] may be manifested by the presence in the taxing State of the vendor’s property or the conduct of economic activities in the taxing State performed by the vendor’s personnel or on its behalf.” Consequently, in finding the New York statute constitutional, the court dismissed Amazon’s complaint. The resulting appeal in the New York Court of Appeals affirmed the lower court’s decision on the constitutionality of the state statute. The subsequent denial of certiorari by the United States Supreme Court meant that New York had successfully defeated the largest online retailer in the battle to collect state sales tax resulting from presence due to the affiliate programs.
Amazon could potentially follow in the footsteps of Overstock, which withdrew its affiliate program from the state of New York after the decision was first issued. However, if Amazon did so then it would run the risk of losing additional business generated from the New York affiliate programs. Still, if every state follows the model of New York, Amazon runs the risk of having to deal with fifty different state bureaucracies’ sales tax statutes.
B. Illinois Tax Statute Deemed Discriminatory Against E-Commerce Companies
Despite New York’s success in using the affiliate program as a mechanism to mandate the imposition of a sales tax, in a similar case the Illinois Department of Revenue was unsuccessful in trying to impose such a tax. In Performance Mktg. Association v. Hamer, the Illinois Supreme Court struck down a state statute that imposed a tax collection obligation on out-of-state retailers who paid Illinois residents when advertisements on their website led to sales on the online retailer’s website. Illinois asserted that the use of state residents by out-of-state online retailers created a physical presence and a duty on behalf of the online retailer to collect sales tax. The plaintiff argued that the Illinois statute constituted a discriminatory tax on electronic commerce because print and broadcasting entities using Illinois residents and compensating them based on sales performance did not mandate a tax collection obligation. The decision by the Illinois Supreme Court, especially when contrasted with the decision of the New York Court of Appeals, illustrates the competing interpretation of whether affiliate programs may be used to force online retailers to collect sales tax.
III. Proposed Federal Legislation and Tax Agreements to End Disputes
While zealously litigating and lobbying against the tax statutes in New York and Illinois, Amazon founder Jeff Bezos has been an ardent proponent of a federal online sales tax.
A. Amazon Founder Supportive of Federal Legislation to Solve Tax Disputes
In an interview with Consumer Reports Bezos said, “[o]ur point of view on this is that we should simplify the sales tax system, and we’ve been consistent on this for about 10 years . . . Because the right way to fix this is with federal legislation. That’s where it can be fixed properly.” Bezos supports the Marketplace Fairness Act of 2013. The Act, which passed in the U.S. Senate in the spring of 2013, stipulates that online retailers that do not have a physical presence in a state where they make sales must collect sales tax if they have gross annual receipts in the United States exceeding one million dollars. If passed, this legislation would give large online retailers a streamlined process for imposing state sales tax on customers. They would not be subject to fifty different state statutes for imposing sales tax. Despite the upside of this proposed legislation, there is speculation that the bill will not pass in the U.S. House of Representatives due to concerns that its passage would lead to a tax increase for constituents.
B. Amazon Solves Disputes with Some States by Reaching Sales Tax Agreements
Besides supporting efforts for a federal online sales tax, Amazon has reached tax agreements with some states in an effort to preempt state legislation that would force the retailer to impose a sales tax. One of these states is Florida, where Amazon reached an agreement to build warehouses, and create as many as 3,000 jobs as part of a $300 million investment. In return, Florida will delay mandating that Amazon impose a sales tax on customers in the state. A similar deal was reached with the state of South Carolina. In exchange for building a distribution center and bringing jobs to South Carolina, Amazon will not have to collect tax there until 2016.
The tax agreements with selected states serve as only short-term shields from the long-term collection of sales tax in these states. For example, Amazon agreed to build two warehouses in exchange for a year-long exemption from collecting sales tax in the state of California. That year has passed, and now the tremendous advantage that Amazon had against traditional brick-and-mortar retailers is gone for the foreseeable future. Nevertheless, Amazon might feel that such short-term preclusions of tax collection for the building of warehouses may be more advantageous than costly litigation and renewed state tax legislation.
IV. Impact of State Tax Agreements If Federal Legislation is Unsuccessful
As the short-term tax deals that Amazon has negotiated with states expire, more and more customers will begin to pay sales tax. However, positive outcomes may result from these short-term arrangements. Amazon has a greater network of distribution warehouses than it had prior to the tax disputes through settlements they reached with states like South Carolina, California, and Florida. Amazon has stated that this greater quantity of warehouses has meant that it will be able to save up to a day off its two-day shipping time. Therefore, in losing what many consider a competitive advantage—no sales tax in these states—Amazon gains another advantage: faster shipping speed than many of its online competitors.
It is also questionable whether collecting states sales tax in these states will lead to a large loss of customers. If these customers go to brick-and-mortar stores instead, they will have to pay sales tax there as well. Moreover, imposing state sales tax may prove less restrictive and burdensome on actions that Amazon may undertake going forward. In states where Amazon does not collect sales tax due to lack of a physical presence, the company has restricted employee travel. Amazon fears that employees traveling to those states on business would constitute the “nexus” requirement under Quill Corporation v. North Dakota. Further, by imposing a tax Amazon could reinstate its affiliate programs in states where it chose to abandon the programs due to proposed online tax legislation. States in which Amazon severed ties with affiliates due to state online tax legislation include Arkansas, Missouri, Minnesota, and Rhode Island. The reinstating of these affiliate programs along with faster shipping times and a lesser need for litigation and lobbying may make up for the loss of those customers that leave due to the collection of sales tax.
The only certainty in regard to the Amazon sales tax situation is that the status quo will not remain. Amazon may reach agreements with states that it currently does not collect a sales tax in, or a federal law may be passed to govern the imposition of online sales tax. By doing nothing states are losing out on vast quantities of tax revenue from online purchases. Brick-and-mortar retailers have lobbied and will continue to lobby state officials over what they view as an unfair competitive advantage enjoyed by online retailers like Amazon. In spite of the likelihood that the number of states where Amazon must impose a sales tax will increase, all is not lost in terms of Amazon having continued success. The faster shipping times that result from an increased number of distribution centers, and the ability to reinstate affiliate programs could mean continuing years of prosperity and success for the nation’s largest online retailer.
*J.D. Candidate, University of Illinois College of Law, expected 2016. B.A. International Affairs, University of Georgia, 2012. First, I would like to thank God for this opportunity. This column would not have been possible without the guidance of Angie Nizio, the Recent Developments Editor at the Journal of Law, Technology and Policy. I would also like to thank my friends and family for all of their encouragement and support.
 Graeme McMillan, Why Doesn’t Amazon Collect Sales Tax? The Constitution, That’s Why, Time Tech (May 18, 2011), http://techland.time.com/2011/05/18/why-doesnt-amazon-collect-sales-tax-because-of-the-constitution-thats-why/.
 Greg Stohr, Amazon Rejected by U.S. Supreme Court on New York Sales Tax, Bloomberg Businessweek (Dec. 2, 2013), http://www.businessweek.com/news/2013-12-02/amazon-rejected-by-u-dot-s-dot-supreme-court-on-new-york-sales-tax.
 Robert Barnes, Supreme Court Declines Case on Making Online Retailers Collect Sales Taxes, Wash. Post (Dec. 2, 2013), http://www.washingtonpost.com/politics/supreme-court-declines-case-on-making-online-retailers-collect-sales-taxes/2013/12/02/e430ec8c-55f5-11e3-835d-e7173847c7cc_story.html.
 Rob Mandelbaum, Amazon Denies It Has a Small-Business Problem, N.Y. Times (Dec. 12, 2011, 11:00 AM), http://boss.blogs.nytimes.com/2011/12/12/the-backlash-to-amazons-price-check-promotion-builds/?_php=true&_type=blogs&_r=0.
 David Streitfeld, Amazon, Forced to Collect a Tax, Is Adding Roots, N.Y. Times (Sept. 11, 2012), http://www.nytimes.com/2012/09/12/technology/amazon-forced-to-collect-sales-tax-aims-to-keep-its-competitive-edge.html.
 Robert W. Wood, Amazon No Longer Tax-Free: 10 Surprising Facts as Giant Loses Ground, Forbes (Aug. 22, 2013, 3:14 AM), http://www.forbes.com/sites/robertwood/2013/08/22/amazon-no-longer-tax-free-10-surprising-facts-as-giant-loses-ground/.