Category Archives: Amazon Law
Cook County Judge Throws Out Illinois Amazon Tax
I came home yesterday to the good news that a Cook County judge threw out the Illinois Amazon Tax stating that the tax was unconstitutional.
Last year, Illinois Governor Pat Quinn signed into law the Amazon Law, which was designed to tax out-of-state goods bought on the internet. The Amazon tax is just a bad idea that would cause a decrease in revenue and cause businesses to leave Illinois. According to ABC news this is exactly what happened.
”We’ve built a home here for seven years,” said Lauren Boukas of CouponCabin.com. “The last thing we want to do is leave Chicago. “We’re all Chicagoans and love living here, but we have to do what’s best for the business.”
But leave they did. Internet retailer Coupon Cabin moved to northwest Indiana after the online sales tax law passed.
The legislation even required giants Amazon and Overstock.com to collect Illinois sales tax if they partnered with Illinois-based companies. At the time, Amazon, for one, said it would simply cut ties with Illinois firms.
As a result of the Amazon Tax, a suit was filed by the Performance Marketing Association. Cook County Judge Robert Lopez Cepero ruled on that case yesterday and stated that the Illinois Amazon Tax was unconstitutional because it violated the Commerce Clause of the Constitution.
Amazon Tax, the Dormant Commerce Clause, and the “Click-thru” Nexis
These attempts to collect-out of-state revenue have run into trouble through a difficult and complicated aspect of constitutional law known as the Dormant Commerce Clause. The dormant commerce clause is probably one of the most difficult concepts of constitutional law, it is the bane of every law students existence. Constitutional law courses will spend three or more classes and a hundred pages of boring case law on this aspect of law, and in the end, the average law student will still have no clue what it means. In a nutshell, as applied to taxes, the dormant commerce clause is a principal that says states cannot initiate a tax that would hurt interstate commerce. Currently the principal case on the issue is Quill Corp. v. North Dakota , 504 U.S. 298 (1992). The holding from the United States Supreme Court states that here has to be some substantive nexus with the state in order for the state to collect taxes. In English, this means there the company has to have some sort of “presence” in the state.
Here is the part of the Amazon law that is constitutionally dubious, and has costed taxpayers tons of money. The law states that a nexus is created when Amazon enters into an agreement with an in-state company, or “affiliate”, to refer customers via a “click-thru” in exchange for commission or revenue sharing. In English, it is like this. You see those banner ads on websites that have advertising on them? When you click on them, they send you to an e-commerce site. The website that is hosting the banner add collects advertising revenue from the e-commerce site, based on the number of clicks. The law states that if Amazon, or any other e-commerce site, creates this type of agreement with a website, then the nexus between Amazon and that state has been created, and the burden is on Amazon to show that one has NOT been created. This is the legislature’s attempt satisfy the holding of Quill with regards to out-of-state internet commerce, the problem is there has been no legal ruling on this issue until yesterday.
This is the first time a court has decided whether or not affiliating with an in-state company will create the logical nexus necessary to satisfy the holding of Quill; or whether there needs to be some physical presence of a company in state to satisfy Quill. From my opinion, Judge Cepero was correct in his ruling because the purpose of the Dormant Clause, and the holding of Quill is to encourage interstate commerce. Quill did not anticipate the advent of e-commerce, it was decided in an era when Prodigy was the “new big thing” and users had to put their phone receivers on the modem to connect. Quill focused on catalog services. However the principals of Quill still apply. If I were to make an analogy, it would be like a New Hampshire catalog company being charged Illinois state sales tax because they use a printing press in Illinois. It is difficult to believe that Quill would allow for this situation.
That said, this is the very first step in a long series of litigation that will likely make it up to the Supreme Court, costing the taxpayers millions in litigation costs.
Federal Laws take aim at Amazon Tax Issues
Sorry I have not been writing for a while. Skyles Law Group is getting off to a great start, and I have been preparing to move offices. This, combined my obligations to actually practice law, means I have not had any time to blog, and there has been a lot of news lately. I have not been writing about the changes in ICANN , or the legislative activities involving PROTECT-IP and SOPA, (aka. Lucifer and Beelzebub), even though they have been in the news lately. This will change.
Continuing with previous themes, there has been developments in the Federal Amazon Law. The Venerable Declan McCullagh over at CNET has written a comprehensive article on the subject. In short, while Amazon.com has endorsed one of the two bills going through congress, others are not on board and are preparing to fight. Here is an exherpt.
“It (Ebay) is the largest retailers that are growing,” Cohen will tell a House of Representatives committee tomorrow, according to remarks obtained by CNET. “And not surprisingly, those giant retailers are lined up united in proposing a change in remote sales tax law.”…
eBay’s remarks represent an escalation in the war of words between it, Amazon.com, and big box retailers. An excerpt from Cohen’s (Tod Cohen, Ebay’s General Counsel) remarks:
The largest retailer on the Internet, Amazon, is a business with a national network of facilities, and is growing fastest. The giant “Brick & Click” retailers are also growing their market share online. In short, while small business retailers are active online and are adopting technology, they are not winning the race under the status quo…
The face of retail has changed dramatically over the past four decades. At the heart of the story has been the expanding dominance of giant retailers at the expense of small business. Giants have grown more dominant in retail; small independent retailers have been pushed to the edges. To illustrate, big-box discount retailers accounted for 42 percent of total retail sales in 1987. As of July 2010, their market share had jumped to 87 percent… The retail giants make up 18 of the Top 25 retail websites today…
The article addresses the main problem with the state Amazon laws, namely the Quill decision. It accurately states however, that Congress could step in, and that is exactly what Congress is doing in this case. More to come I am sure.
Interesting Video: Advocacy Group on Amazon Laws
Stand with Main Street is an issue advocacy organization supported by brick-and-mortar retail associations, whose purpose is to end what they call the “internet sales tax loophole”. They have recently posted this video, which is their take on the impact of the loophole, and why they favor so called “Amazon Laws”.
I agree that it seems unfair that internet retailers seem to be able to by-pass state sales tax. The issue is not fairness, the issue is constitutionality. The question has always been whether or not the laws are constitutional on their face. Men must govern themselves by their wit, commerce must always be governed by the rule of law.
My only other issue with the internet sales tax loophole is the means by which they attempt to solve the problem. Amazon laws manipulative by their very nature. The net result is not only does the state lose, but companies that are savvy enough to affiliate with Amazon also lose.
You can decide for yourself
Illinois “Amazon Tax” Not Producing Revenue “Results”
My home state of Illinois is in a debt crisis. This past May they passed the “Amazon Tax”, in an effort to increase revenue. It did not have the desired results, revenue has not increased nearly to the $150,000,000 that was forecast by those in favor of the legistlation. In fact it had the opposite result, businesses are leaving Illinois because of the Tax. From Crain’s Chicago Business:
Getting Internet retailers to collect sales taxes from customers doesn’t look any more promising. A pair of local websites that channel orders from Amazon.com Inc. and Overstock.com Inc. recently left the state, circumventing a new Illinois law that would have used them as a conduit to tax sales by the giant online retailers. Without Amazon, Overstock and others on board, it’s going to be tough to make a dent in the uncollected taxes….
CouponCabin and its employees departed River North for Whiting, Ind. Rockton-based FatWallet moved a few miles north to Beloit, Wis., in April, a spokesman says. Each employs fewer than 100 people.
“We don’t get much from affiliates, less than 10% of our business,” says Jonathan Johnson, president of Salt Lake City, Utah-based Overstock.com, which sells excess merchandise at a discount. “But it would have meant all of our sales in Illinois would have been subject to tax. We don’t want to be the sales tax collector, so we just terminate the affiliates.”
“If the goal is to increase revenue, it fails,” Mr. Johnson adds. “We don’t pay the tax, and good businesses employing people in Illinois and paying income tax leave for neighboring states.”
California Compromises on Amazon Tax Law
Mercury News is reporting that the California Legislature has passed a compromise concerning the “Amazon.com Tax”. To summarize, the “Amazon.com tax” was an attempt by California and other state legislatures to collect sales tax on purchases on the internet. The problem is that it is unconstitutional for states to collect taxes on a business that doesn’t have a “presence” in that state. States have attempted to side step this issue by stating that a company has “presence” if they contract with “affiliates”. In California, Amazon cut ties with some 10,000, affiliates, potentially costing thousands of jobs, due to the tax. I have written extensively about the constitutional issues here on Ask A Cyber Lawyer, in the post “Texas Amazon Law, and the Dubious Click-thru Nexus“
Amazon.com has also decided to take legal action by both calling for a referendum on the Amazon Tax, and attacking the law’s constitutional status. Now it seems, California is backing off, by agreeing to not collect taxes vis-a-vis the Amazon.com Tax, for a one year, while they wait-and-see if and how Congress will address the issue. From the Mercury News:
The bill gives Amazon at least a year before it has to begin collecting sales taxes from its customers and paying the state roughly $200 million a year. In return, Amazon backed down from its threat to place a referendum on the ballot to repeal a law that required the online retailer to pay taxes.
Traditional retailers were jubilant that Amazon would be held to the same taxation standards as them.
“Passage of e-fairness legislation in California should send a message to every other state in America and the federal government that we must stand by our small businesses as they are the engines for job creation and economic growth in our communities,” the California Retailers Association said in a statement.
The group has maintained that by refusing to collect sales taxes, Amazon had an unfair advantage over California businesses that do.
The agreement will bring thousands of jobs and hundreds of millions of investment dollars to California, and “tens of thousands of California-based advertising affiliates” will be welcomed back, said Paul Misener, Amazon vice president for global public policy….
Amazon has until July 31, 2012, to see if it can spur congressional action for a federal fix — to avoid having to deal separately with all 50 states. If Congress passes an Internet taxation law, it would supersede Amazon’s agreement with California. But if there is no congressional action, Amazon would begin paying California taxes on Sept. 15, 2012.
The wait and see approach is a start, but since other states have passed the “Amazon.com Tax” the constitutional issues still remain.
Texas Amazon Law, and the Dubious Click-thru Nexus
It appears the a new version of the Texas “Amazon Law” is on its way to the desk of Governor Rick Perry for signature. If signed, Texas will join Illinois, New York, California, Colorado and Iowa in attempting to tax out of state goods purchased on the internet. Governor Perry has vetoed a similar measure before, and it would be wise for him to do it again for two reasons. The law will face a difficult constitutional challenge. Texas business will suffer and it will have the unintended effect of decreasing revenue, in spite of an increase of Taxes.
Amazon Law, the Dormant Commerce Clause, and the “Click-thru” Nexis
In a response to a decrease in sales tax revenue, states have recently attempted to in act so-called, Amazon Laws, which are designed to tax out-of-state goods bought on the internet. As stated in a previous post, these attempts to collect-out of-state revenue have run into trouble through a difficult and complicated aspect of constitutional law known as the Dormant Commerce Clause. The dormant commerce clause is probably one of the most difficult concepts of constutional law, it is the bane of every law students existence. Constitutional law courses will spend three or more classes and a hundred pages of boring case law on this aspect of law, and in the end, the average law student will still have no clue what it means. In a nutshell, as applied to taxes, the dormant commerce clause states that states cannot initiate a tax that would hurt interstate commerce. Currently the principal case on the issue is Quill Corp. v. North Dakota , 504 U.S. 298 (1992). The holding from the United States Supreme Court states that here has to be some substantive nexus with the state in order for the state to collect taxes. In English, this means there the company has to have some sort of “presence” in the state.
Here is the part of the bill that is constitutionally dubious, and will end up costing millions of tax payer dollars in litigation. The bill, and similar bills to it, state that a nexus is created when Amazon enters into an agreement with an in-state company, or “affiliate”, to refer customers via a “click-thru” in exchange for commission or revenue sharing. In English, it is like this. You see those banner ads on websites that have advertising on them? When you click on them, they send you to an e-commerce site. The website that is hosting the banner add collects advertising revenue from the e-commerce site, based on the number of clicks. The law states that if Amazon, or any other e-commerce site, creates this type of agreement with a website, then the nexus between Amazon and that state has been created, and the burden is on Amazon to show that one has NOT been created. This is the legislature’s attempt satisfy the holding of Quill with regards to out-of-state internet commerce, the problem is that none of this has been litigated.
For the next decade, the courts will litigate whether or not affiliating with an in-state company will create the logical nexus necessary to satisfy the holding of Quill; or whether there needs to be some physical presence of a company in state to satisfy Quill. From my opinion, it does not look good for the states because the purpose of the Dormant Clause, and the holding of Quill is to encourage interstate commerce. Quill did not anticipate the advent of e-commerce, it was decided in an era when Prodigy was the “new big thing” and users had to put their phone receivers on the modem to connect. Quill focused on catalog services. However the principals still apply. If I were to make an analogy, it would be like a New Hampshire catalog company being charged Illinois state sales tax because they use a printing press in Illinois. It is difficult to believe that Quill would allow for this situation.
The Illinois version of the Amazon Tax is already the subject of litigation, only a month after it was signed into law by Governor Pat Quinn.
Loss of Revenue
As was done in Colorado, and is threatened in Illinois, Amazon will respond to this by closing its distribution in Texas, nullifying a physical nexus. It will then cancel its affiliations in Texas. Amazon is so big, that losings its affiliates in Texas will not hurt Amazon. Amazon will still be able to sell in Texas and collect money from Texas consumers without being taxed. This will hurt Texas because Texas companies will not be collecting “click-thru” revenue from e-commerce companies that remove their affiliation with Texas businesses. Not only will this affect Texas companies ability to collect money, it will also decrease the amount of taxable revenue for the State. The end result is less jobs, and less revenue, the exact opposite of the desired effect.
These attempts at gaining revenue are bad news, and Governor Perry should strongly consider vetoing the bill as he did before.
James Skyles
