Amazon v. The NC General Assembly
By: Donna Ray Chmura. This was posted Thursday, June 18th, 2009
Amazon.com sent a notice yesterday morning to its “affiliate” sellers living in North Carolina stating that Amazon may terminate its North Carolina affiliates due to a pending “unconstitutional” change in the state tax law that would require Amazon to collect and pay NC sales tax on its NC sales.
Affiliates are owners of private web pages who promote items for sale from Amazon.com in exchange for a share of the sales. If I put some Amazon book recommendations for business or business law books on the side of NCLawBlog, set up an affiliate account, and readers clicked through to buy those books, I would be an “affiliate.” I would receive a commission on each sale and I would pay state and federal income tax on those commissions.
Under current state law, if a retailer does not have a brick-and-mortar location, employees or another “nexus” with the State, it does not collect sales and use tax on an online transaction. Instead, the buyer is supposed to self-report the purchase and pay the sales and use tax when he files his income tax return.
House Bill 558 and Senate Bill 487 would shift the collection burden to the retailer, who would collect the sales tax at the time of purchase and remit it to the state. This law, if passed, would apply to other online retailers that don’t have employees or facilities in North Carolina, and not just Amazon.
Instead of collecting and paying sales tax, Amazon is threatening not to use NC affiliates at all. This is not a new tax on income received by the affiliate, but a change in who collects and remits the sales tax to the state. The General Assembly estimates it will generate $13.2 million from this change.
In 1992, the the U.S. Supreme Court ruled in Quill v. North Dakota 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 because compelling merchants to adhere to the complexities of the state and local tax codes would place an unreasonable burden on interstate commerce. This is a very relevant point.
North Carolina’s view, based on the statute is that online retailers hold a physical presence in North Carolina because they derive sales through its affiliates who live here. It is a controversial position that also has been proposed in New York, California, Hawaii, Illinois, Connecticut and Minnesota.
Reactions range from the outrage of entrepreneurs who are potentially losing a revenue stream based when online merchants end affiliate programs in North Carolina to the support of people who think online merchants are at a competitive advantage over local businesses because their sales are not subject to sales tax.
As a general business lawyer, and not a tax attorney or CPA, my common-sense reading of the existing statute is that a company that “purposely or systematically” exploits the market of NC through any media-assisted means, including computer-assisted shopping, direct mail advertising or other electronic media, is required to collect sales tax. My educated guess is that even without using affiliates, Amazon directly advertises, emails and sends direct mail to customers and potential customers in North Carolina. My best guess is that this provision has never been enforced, and the State would rather broaden its scope and then implement enforcement, than suddenly start enforcing a neglected provision. States are scrambling for funds wherever they can get them.
I can also see the unintended consequence of causing North Carolina taxpayers to lose income, and then pay less income tax, when they lose their affiliate commissions.
The solution is to simplify the multiple state taxes through federal legislation, but such a streamlined sales tax project is understandably mired in bureaucratic infighting and hesitation to impose a new federal tax.
I’m very interested in public response to this issue. Is it an unfair penalty to webpreneurs? Is it unfair to online retailers headquartered in other states with no facilities in North Carolina? Or does it take the burden off ordinary taxpayers and local businesses?
Tags: Afflilates, Amazon, Amazon tax, brick-and-mortar locations, HB 558, Income Tax, NCGS Section 105-164.8, nexus, North Carolina General Assembly, online merchants, Quill v. North Dakota, Sales and Use Tax, SB 487, Streamlined Sales Tax Project, US Supreme Court
The mimimum contacts test of the due process clause of the 14th amendment is clearly met by Amazon (and others), even aside from the presence of affiliates within the state as the due process doctrine is quite broad by this point. The more important test lies within the commerce clause, where there is a similar test (substantial nexus vs. minimum contact with regard to the foreign vendor. In Quill the Court upheld an earlier decision (Bellas Hess) in which it created a bright line rule that conducting business through a common carrier or the US mail alone was not sufficient to meet the requirements of the Commerce Clause. One could argue (back and forth) whether the internet differs from the use of other common carriers (e.g. telephone companies), however, the issue is more complex.
The presence of affiliates in NC means, the state argues, that Amazon can be compelled to collect sales taxes on products delivered into NC. This means that if I go directly to the Amazon site and buy something, I will be charged sales tax becuase of the presence of affiliates (which did not take any part in the transaction) within the state. Likewise, if I go to a website based in Oregon and click on a link to buy the fishing pole that is being reviewed, and that dumps me to Amazon, Amazon will need to collect sales tax from me (becuase it has affiliates in NC).
The Court has made clear that while due process is about the affect on the individual, the commerce clause is about the impact on the national economy. In effect, NC can pass a law that leads me not to patronize a website in another state (opting instead to purchase my fishing pole through a company that does not have affiliates in NC). I think that this is where the law fails, at least under current jurisprudence.
The Court in Quill (and particularly Justice Scalia in his concurring opinion) noted that the doctrine of stare decisis has “special force” in situations where Congress is free to act in contravention of the Court’s reading of current law. Congress can act to give effect to laws such as the one being considered here, but in the absence of Congressional action, I do not think the tax withstands commerce clause jurisprudence.
Posted by: Scarlet Knight | June 18th, 2009 at 1:46 pmIf a traveling salesman crosses the state line and makes a sale in NC, which state’s taxes are collected?
I ask because it seems to me that, by becoming a paid (by commission) associate for Amazon is roughly akin to being a paid (by commission) sales representative. If this law puts the virtual “sales rep” on the same tax footing as the physical “sales rep,” why should it be wrong to do so?
Posted by: wesmorgan1 | June 26th, 2009 at 1:20 pmIf I can just take a second and thank the author of this blog I would like to do just that. Thank you.
Posted by: new york computer repair | June 28th, 2009 at 6:05 pm@wesmorgan1: That’s a deceptively complex question. And I am once again going to state that I am NOT a tax attorney.
For a retail operation, traditionally, the company only had to collect and report sales tax if it had a physical location within the state or used direct mail/catalogs or TV/radio ads to target NC customers. Otherwise, the purchaser (individual) is supposed to report and pay use tax on the online or mail order purchase.
The unfair playing field is between someone like Target with retail locations in NC and someone like Overstock.com without these facilities. Overstock does not have to collect/charge sales tax, which makes its products cheaper here.
Business purchasers generally are better at self-reporting “remote” or “mail-order” purchases because most of these purchases are listed on tax returns as deductions, and it is fairly easy to see where the expenditure was made and if the seller collected sales tax.
Many commissioned sales agents are not selling retail products, and the changes to the law are specifically for retail products.
These questions are extremely fact-specific and hard to answer based on generalities.
Posted by: Donna Ray Chmura | June 29th, 2009 at 2:20 pmI really enjoyed this post. I will definitely check back later for more informative posts from you. Thanks!
Posted by: Jennifer R. | June 30th, 2009 at 2:14 pmDonna,
First of all I would like to say thank you for writing this article. As you may have noticed this issue has been getting much more press recently since amazon did end up preemptively dropping all of it’s NC affiliates. Still this remains the most well informed and insightful article about the issue and the only I have come across that actually links to the legislation in question.
I run a few, currently very small, websites and initially I was appalled to be loosing my affiliate status with amazon. I rushed to blame my lawmakers as is my habit, but after reading you article I have a much better understanding of the complexities of the situation and can really sympathize with all sides of the issue.
Thanks to your links I have spent the afternoon pouring over the related legal documents I could find. I have very minimal legal training, as I am a computer scientist by trade, but also I am very accustomed to reading very dense papers of other scientist and the even more esoteric tomes of antiquated source code so in-comparison tax law was not too particularity difficult to follow.
I agree with you that obviously the solution is to simplify the multiple state taxes through federal legislation, or at least through federal law provide a clarification of what exactly constitutes “substantial nexus.”
I is my humble opinion that affiliates within the sate do not. The reason I feel this way is because, while the affiliates may live in NC I find it unlikely, at least generally, that they are targeting a NC audience with their advertising. So in that sense affiliate advertising should be considered as a common carrier like the mail system.
With the advent of amazon pulling out of NC I really think this could do more damage than good. I think the estimates of $13 million in revenue are a bit inflated. But even if true that money will do little to benefit the NC population as a whole when compared to the utter devastation it is going rep on many NC webpreneurs. It is may opinion that even giving 13 million to schools is deplorable if it unjustly costs even one family their livelihood.
Posted by: Jacob Pennock | July 29th, 2009 at 4:15 pmGlad i came across this blog.Added “North Carolina Law Life » Blog Archive » Amazon v. The NC General Assembly” to my bookmark!
Posted by: Family20Guy | June 14th, 2010 at 10:15 pm