Technically Legal

Amazon has recently cancelled affiliate programs in Hawaii and North Carolina to avoid collecting sales tax in those states.

Several states have passed laws, or in the process of passing laws, that will make Amazon, or other online retailers, collect sales tax for states where they have affiliate members. Amazon has challenged the constitutionality of these laws in some states.

Amazon will be relying on two cases in their defense, National Bellas Hess v. Department of Revenue (1966), and Quill Corp. v. North Dakota (1992). In both cases a state (North Dakota and Illinois) required that the plaintiff corporations collect sales tax on behalf of the state.

First, to clear something up. When you buy something online and have it shipped to your state, you are supposed to pay sales tax. If you’re buying from, in my case, a Massachusetts corporation, that corporation has to collect sales tax and remit it to the state. Even if that corporation has an office, a warehouse, or a substantial number of employees, or in the old days, door-to-door salesmen, in the state, they would have to collect the sales tax. If you buy online and the online retailer doesn’t collect sales tax, you, the buyer, are still supposed to send that money in to the state. Many state tax forms now have a box to fill in how much you bought online that wasn’t taxed.

In Bellas Hess, the Supreme Court held that both Due Process and the Dormant Commerce Clause prevent the state from forcing out of state companies to collect sales tax. They had to have some physical connection with the state. Either an officer, warehouse, or small sales force would suffice. Twenty-six years later the Supreme Court reconsidered the decision after the Supreme Court of North Dakota said that technological advances since 1966 made the older ruling obsolete. The Supreme Court agreed that the Due Process argument, requiring minimal contacts with the state, was no longer applicable and had evolved to the point that it was no longer an issue. The Court continued to rely on the Commerce Clause, holding that if a state tries to make a out-of-state corporation, with no in-state ties, collect sales tax, it unduly burdens interstate commerce, and is unconstitutional.

The new affiliate laws consider state residents who get kickbacks for sending traffic to Amazon to be a kind of sales force for the purpose of Bellas Hess and Quill. While the question is unresolved, my best guess is that while it would be simple for Amazon to collect this tax, the courts won’t find it constitutional. A sales force has the ability to enter their employer into contracts, affiliates have no such power. While they get kickbacks, and send traffic to amazon, they don’t do any selling. It’s more like door-to-door delivery of a mail order catalog, than actual door-to-door sales people.

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