Minnesota this week became the latest casualty in Amazon’s war against Internet sales tax. The online retail giant claims it supports the federal Marketplace Fairness Act, which, if passed, would require online retailers to collect sales taxes from customers in every state, whether or not they have a physical presence in those states. Nevertheless, Amazon has ended its affiliate marketing program in Connecticut, New York, Illinois, North Carolina, Arkansas, California, and now Minnesota, in response to the passage of laws in those states that would require Amazon to collect sales taxes on purchases made within their borders.
The states say that Amazon’s affiliates count as a physical presence for the purposes of taxation. In a letter to its former Minnesota affiliates, Amazon called the law, which would require it to collect 6.875 percent sales tax on Minnesota purchases, “unconstitutional.” When Amazon dropped its 10,000 California affiliates in 2011, it said, “We oppose this bill because it is unconstitutional and counterproductive. Similar legislation in other states has led to job and income losses, and little, if any, new tax revenue.” In a 2011 letter to Amazon’s dropped Connecticut affiliates, the company said, “[The law] was supported by big-box retailers, most of which are based outside Connecticut, that seek to harm the affiliate advertising programs of their competitors.”
Amazon bases its hard-line stance on the 1992 U.S. Supreme Court decision in Quill Corp v. North Dakota, in which the court ruled that a state cannot require a retailer to collect sales tax unless said retailer has a physical presence in the state. Traditionally, a “physical presence” has been defined as a brick-and-mortar store, but the new Minnesota law, similar to those passed in other states, includes affiliate marketers in the definition of “physical presence.” Amazon maintains that its affiliates are independent entities and that the affiliate program is an advertising network, not a distribution channel, and as such does not constitute a physical presence. The retail giant took the matter to court in New York, where, in March 2013, the Court of Appeals ruled 4-to-1 that Amazon’s affiliate marketers create enough of an in-state presence to justify the collection of sales taxes on goods it sells in the state.
Dropping affiliates in states that pass Internet sales tax laws defeats the purpose of the laws, which are intended to raise revenue for the states. Federal legislation, like the Marketplace Fairness Act, would leave Amazon – and 200 other online retailers with similar affiliate marketing programs – no place to hide. These retailers would be obliged to collect sales taxes in every state. On the plus side, they’d be able to welcome back their disenfranchised associates – as Amazon has promised it will do in Minnesota when the Marketplace Fairness Act is passed. That’s good news for the thousands of affiliate marketers, large and small, who’ve been deprived of a significant source of income in the wake of Amazon’s attempts to wiggle out of complying with state laws.