Policy Documents

New ‘Amazon Taxes’ Hit State Budgets Hard

Thomas Cheplick –
April 14, 2010

States including New York, Rhode Island, and Colorado have begun instituting a new online commerce tax designed to “level” the playing field between online retailers and in-state retailers. However, reports from these states show these “Amazon taxes” are having a backfire effect on state budgets.

"They are absolutely not effective,” said Kelly William Cobb, director of StopETaxes.com and a researcher at Americans for Tax Reform.

“The biggest problem is that once they are instituted, Amazon.com and other online retailers will cut off their in-state nexus with an advertiser, so states will not be able to raise much revenue anymore from that in-state advertiser. . . These Amazon.com taxes are in effect job killers, by taking out revenue from in-state advertisers," she added.

Repeal Effort
Joseph Henchman, a tax analyst at the nonpartisan Tax Foundation in Washington, DC, notes the Amazon tax recently instituted in Rhode Island has had such a bad effect there is now an effort to repeal the measure. As the Tax Foundation and other critics of the tax predicted, Rhode Island is collecting much less from the tax than was projected.

"When states have passed an Amazon tax, what happens is online retailers terminate their in-state referral programs, which they have done in Colorado, in Rhode Island, and elsewhere, and then states lose revenue,” Henchman said. “There is a proposal in Rhode Island right now to repeal their Amazon tax because of this."

‘Punishing Online Competitors’
Henchman said the three main arguments put forward by proponents of these Amazon taxes are all wrong.

"The first argument is one of revenue escaping. This has been proven not to be the case—Rhode Island and North Carolina have really gotten nothing from their Amazon tax,” he said.

The second argument is that these taxes level the playing field between brick-and-mortar stores and online retailers. Henchman said that belief is wrong because the taxes actually hurt online companies much more.

“Online companies are forced to have to calibrate sales tax in all 8,000 sales tax bases all over the United States, and these tax rates are always changing and always have new exceptions,” Henchman said. “So it is not about leveling the playing field, it's about punishing online competitors.”

The third argument is that “Amazon.com taxes' are constitutional because the New York Supreme Court has ruled they are.

“Not true,” Henchman said. “The New York Supreme Court is a trial court. The highest court in New York State is the New York Court of Appeals, where the debate is headed."

Tax Pain
Cobb explained Amazon.com taxes end up hurting mom-and-pop bloggers.

“Those in-state advertisers are the ones who give the money to that state's stay-at-home mom bloggers,” said Cobb. “These in-state advertisers serve as the [alleged] nexus [constituting an in-state presence of the firm, allowing it to be taxed as if it had a brick-and-mortar presence in the state]. So when they pass these laws, online retailers are effectively saying 'fine,' and they cut the link with the in-state nexus, that in-state advertiser, and the revenue to that state's stay-at-home blogger.

“It is not exactly Amazon.com doing this; it is the state punishing in-state advertising businesses to go after an out-of-state organization,” Cobb added.

Curtis Dubay, a tax analyst at the Heritage Foundation in Washington, DC, said states are levying Amazon taxes because the federal Business Activity Tax Simplification Act of 2009 does not clarify how states are supposed to treat online companies.

"There is Supreme Court precedent saying these states cannot tax businesses that don't have an actual presence—usually that is workers, sales forces, property, plant, equipment, or just a store in the state,” Dubay said. “But these online retailers have essentially none of that. [These Amazon taxes are] a totally new take on what is considered law."

Thomas Cheplick (thomascheplick@yahoo.com) writes from Cambridge, Massachusetts.