This is a link to Amazon.com. If you want, you can click on it and buy things.
According to the state of New York, I am now well on my way to becoming an agent of Amazon who is actively soliciting the New York market. New York wants to use me to put Seattle-based Amazon within reach of its tax collectors.
A state cannot require a company to collect sales tax unless the company has a significant presence in that state. If you live in Oklahoma and I live in New York and I sell you a book, Oklahoma will want to tax your purchase. However, while companies in Oklahoma can be required to collect the tax, I am under no such obligation.
If Oklahoma wants the money, it must get its own residents to pay “use tax” on their out-of-state purchases. Businesses routinely pay use tax, but individual consumers do not, even though the law says they should.
It is not always easy to tell whether or not a company has a presence in a particular state. In Tyler Pipe v. Washington (1987) and Scripto, Inc. v. Carson (1960), the Supreme Court reached the conclusion that if any individual in a state acts on a company’s behalf to establish and maintain a market in that state, then that person’s presence can be attributed to the entire company, meaning that the company must collect sales tax. In Tyler Pipe, the individual was a regular employee, while in Scripto the individuals were independent brokers, but, according to the decision in Scripto, this distinction is “without constitutional significance.” These two rulings meant that a company need not have offices, warehouses or other property in a state in order to be subject to sales tax obligations.
But, as a popular children’s book teaches us, if you give a mouse a cookie, he’ll want milk. If you give a state the power to tax, it will push that power to its limits and maybe further.
In the 1992 case of Quill Corp. v. North Dakota, the state claimed that, because the mail-order office supplies retailer sent its catalogs to North Dakota residents, it could be forced to collect sales tax on the state’s behalf. The Supreme Court disagreed. Because Quill had no physical presence in North Dakota and had no employees or representatives working in North Dakota, it was beyond North Dakota’s jurisdiction.
States are eager to collect more tax from fast-growing Internet sales. They are supported in some cases by brick-and-mortar stores that believe they lose business to distant websites that do not collect local taxes. Thus, states eagerly seek ways to get around the limitations of Quill.
New York, along with a handful of states that are following its lead, thinks it has found the mother lode in a new rule that appears to specifically target Amazon. New York asserts that if Amazon pays commissions to a New York entity for a link like the one at the beginning of this post, and if Amazon generates at least $10,000 in New York sales through that link, Amazon now is doing business in New York and must collect tax on all New York sales.
Amazon and another retailer, Overstock.com, are challenging the law but lost the first round in New York Supreme Court. (In New York, Supreme Court is a trial-level court; the highest court is the Court of Appeals.) The law “requires a substantial nexus between an out-of-state seller and New York through a contract to pay commissions for referrals with a New York resident along with realization of more than $10,000 of revenue from New York sales earned through the arrangement,” Judge Eileen Bransten ruled. “The neutral statute simply obligates out-of-state sellers to shoulder their fair share of the tax collection burden when using New Yorkers to earn profit from other New Yorkers.”
If the judge is correct, then what happens if Amazon pays The New York Times for an advertisement that generates sales in New York? Or buys commercials from NBC, famously based at 30 Rockefeller Center? Or places advertising through an agency on Madison Avenue, which receives a commission based on the ad campaign’s cost? Can New York, under the Quill precedent, attribute the undisputed New York presence of these advertising vendors to the advertiser?
If only Amazon were to pay me for that link at the top of the page, my company’s New York connections could be magically transferred to Amazon under New York’s rule. Never mind that this page was zapped to you from a server in Florida, on which my Delaware-chartered firm rents space.
Tax wonks call this revenue-generating magic “attributional nexus.” Out-of-state vendors like Amazon call it unconstitutional, and I agree. Oklahoma has an annoyingly complex sales tax scheme, with rates varying widely across dozens of jurisdictions. I have never set foot in Oklahoma and have never employed anyone there. I don’t believe Oklahoma has the power to force me to collect its taxes just because I might do business with someone in Tulsa.
New York says the link at the top of this page could potentially make me Amazon’s agent. But, even if Amazon were to pay me, all I am doing is delivering an audience for Amazon’s pitch. I am not doing the pitching. That, in a nutshell, is the difference between an advertising vendor and a sales representative.
States are in a bind. Most rely heavily on sales and use taxes, and those are much harder to collect from consumers than from companies. But states have no power outside their borders, and commerce does not stop at state lines. Either the states find ways to get their own citizens to cooperate in taxing themselves, or they must find other ways to raise revenue.