Sunday, February 21, 2010

The Never Ending Quest For Tax Revenue Leads To No Revenues and No Jobs?

Sales and use tax is imposed by many states, but many people don't pay the use tax on items they've purchased outside the state or much more commonly - on Internet purchases. Some states have established what's referred to as "Amazon tax" laws so that they can attempt to capture tax revenues that otherwise would not have been collected.

The problem with individual states attempting to impose the tax is that they've failed miserably to actually create any revenue because it's discouraged affiliates from participating in programs:
But the state law has done nothing to increase tax revenue. Officials at the R.I. Department of Revenue “do not believe that there has been any sales tax collected as a result of the Amazon legislation,” said Paul L. Dion, who heads the department’s revenue-analysis office.

For a company like Amazon, there is little risk in pulling out of Rhode Island, which has the nation’s fourth-smallest state economy, said Lee Hower, principal at Point Judith Capital, a Providence-based venture capital firm. But affiliate marketing is a “very common” component of many Web startups’ business plans.

“Amazon doesn’t care,” Hower said. “The only thing that Amazon has changed because of this policy is they’ve stopped paying companies in the state. … The reality is we haven’t gotten the revenue or the policy benefits out of this, but we do have this downside.”

Angus Davis, a tech entrepreneur who lives in Providence, said the law should be called an “affiliate tax” since it has no impact on Amazon. “It’s really slamming the door shut at the borders of Rhode Island to any kind of online advertising industry,” he said.
I'm not particularly surprised that there hasn't been any revenues generated from the tax, and that the market has shifted in ways that the states could not imagine - namely that businesses relocated or simply chose not to operate at all.

Yet, for all the problems with the Amazon tax, there are still states contemplating imposing their own form of the tax. The Colorado legislature is contemplating its own version of the tax that wouldn't mention affiliates. Virginia is looking at its own version.

California and New York are looking at the next step since both states are in dire need of additional revenues to feed the insatiable spending in those states. and Overstock are currently litigating whether the New York law violates the U.S. Constitution on Commerce Clause and Due Process grounds and in the process violating Quill v. North Dakota and its progeny.

What will most likely be needed is Congressional action to make such taxation possible. Yet, Congress is not likely to put its own neck on the line to impose still more taxes on an electorate already sick of taxes both existing and proposed. A backlash against taxes that might be imposed on online transactions would be swift and harsh - and for that reason we'll likely see a continuation of various cases and individual states pushing the matter.

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