Amazon.com Cuts Deal With California On Sales Taxes

Amazon.com has cut a deal with California over collecting sales tax on Internet sales. The company will have until July 31, 2012 to collect the tax, and the company has agreed to drop efforts to contest the tax.

States have been looking to Internet sales for years as consumers buy more and more products online rather than in brick and mortar stores. At issue is a concept known as nexus - and states are pretty much prohibited from imposing sales tax on out-of-state companies because those companies lack nexus under Quill v. North Dakota.

Instead of being hit with the additional regulatory and reporting burdens, the company ended its affiliate programs in those states like California. Amazon.com made the business decision that it doesn't want to incur additional regulatory burdens and tax obligations. That's completely within its rights as a business. Ending the relationship with the Colorado affiliates prevents it from being hit with that tax burden. End the tax burden, and Amazon.com would likely resume doing business in states like California and the California affiliates can go back to making money that ends up being taxed in the state (under the gross income tax or the corporate income tax). Claiming that the company is playing foul by fighting the tax obligations ignores that the current law likely violates existing federal law. The law isn't on California's side but the company.

The problem for Amazon is that they're taking a publicity hit because they didn't notify their affiliates in a timely fashion and they look like a bad guy here.

Of course, the state isn't blameless here either. The state imposed this regulatory burden immediately rather than phasing it in, unlike most other state requirements. California hoped that the measure would raise $200 million for the current fiscal year. Most states give a grace period to impose the regulatory requirements - but the California act was effective immediately. That led Amazon to immediately end its affiliate program.

The only real solution is for Congress to clear things up - this affects interstate commerce after all. Congress needs to stand up and set forth what states can do in terms of taxing internet sales, and one possibility is that Congress could allow states to impose sales tax collection burdens but only for the state-level sales tax or state-collected taxes, rather than requiring companies to collect all local level taxes.

This could be further modified by exempting companies with less than $1 million in sales annually or some other similar limit - companies that may not have the capabilities to provide tax filings for all states where such businesses have sales.

It would require amending the Internet Tax Freedom Act, but it's time to deal with the reality of e-commerce and would stop states from trying to do an end run around Quill and would impose a measure of certainty for retailers and states.