As states around the country continue to deal with budget deficits, many are looking for ways to raise revenues so that they don’t have to cut even deeper into crucial public services like education and health care.
One way states are looking to raise revenues is to close what has become known as the “Amazon Loophole.” Currently, online retailers like Amazon.com set up subsidiary corporations in states and then argue that the subsidiary corporation doesn’t obligate the parent company to collect sales taxes in that state.
Lawmakers in numerous states, like South Carolina, Texas, Tennessee, and others are tackling this loophole by mandating that Amazon customers in their states pay sales taxes, which would both provide revenue for their states and deny Amazon and other online retailers an unfair advantage over local retailers whose customers do have to pay sales taxes.
Responding to these legislators, Amazon CEO Jeff Bezos remarkably claimed today that state efforts to close the loophole and have Amazon behave like any other retailer are actually unconstitutional:
Now, Amazon CEO Jeff Bezos is saying that some U.S. states’ tax demands are violating the U.S. Constitution. [...] “First of all, most of where we do business – Europe, Japan, some of the states here in the United States – we collect sales tax. More than half our business,” said Bezos. “We do collect sales taxes, the European equivalent of value-added tax. And 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 the time because the internet did not exist – that mail-order companies could not be required to collect sales tax in states where they didn’t have what’s called ‘nexus.’”
Bezos is referring to a 1992 Supreme Court decision that said “that retailers who lack a physical presence in a state, or ‘nexus,’ cannot be required to collect tax.” Yet states aren’t claiming extraordinary powers to tax Amazon transactions. Rather, they are expanding the definition of “nexus” to “include affiliate programs, such as when Amazon pays a commission for links that result in sales.”
But the Amazon CEO should know that his constitutional argument is bunk. After all, his company lost a constitutional challenge to New York when it sued to stop that state’s efforts to close the Amazon loophole (Overstock.com lost a similar case). “Amazon should not be permitted to escape tax collection indirectly, through use of an incentivized New York sales force to generate revenue, when it would not be able to achieve tax avoidance directly through use of New York employees engaged in the very same activities,” said Judge Eileen Bransten.
It’s crucial that states are able to excise their powers of taxation to get revenue from transactions occuring within their territory, given that state governments are losing millions of dollars thanks to tax dodging by big online retailers. As just one example, in “2011 alone, Wisconsin will lose an estimated $127 million in uncollected sales tax on purchases made online.” Unfortunately, Amazon hasn’t reacted to these state efforts just by challenging them in court. When Texas tried to close its Amazon Loophole, the retailer announced that it would end all business there.