AMAZON and the Law: Too BIG to Fail?

Amazon.com has stirred up quite a bit of controversy with their recent decision to close all online affiliate marketer accounts in Colorado.

In light of the New York State ruling regarding an expanded interpretation of Sales/Use Tax nexus – this could be shaping up to be as big as Google vs. China!

One problem is that  the law does not keep pace with technology.   But the law always catches up.

The United States Supreme Court ruling in the Quill Corp. vs. North Dakota case established that a business needed a substantial physical presence in a state to establish a taxable nexus.

That ruling was in 1992 – several years before Amazon.com established the “web’s most popular and successful affiliate program.”

Much has changed in the world of commerce since 1992.  Can the law catch up with the Internet?

New York State enacted a law in April of 2008 referred to as the “Amazon Tax” which applies to online retailers who contract with “affiliates” that live in New York State.  These vendors must charge the applicable sales tax for sales made and delivered to New York residents based on the presence of affiliates in New York.

Nexus, for sales tax purposes, is when a company has a substantial physical presence in a state.  Having that physical presence gives the state the jurisdiction to tax that entity for the “privilege” of doing business in that state.

Based on the New York court decision it is “possible” that other states may establish nexus by virtue of Amazon.com’s affiliate program structure.  Amazon.com affiliates, or “associates”, must sign up and agree to comply with an extensive operating agreement to become an Amazon.com Associate.

Amazon.com has a very elaborate portion of their site dedicated to their affiliate/associates program where they offer help, support, links and banners to their associates.

It may be a stretch, but Amazon could actually have significant exposure for outstanding tax liabilities dating back to the inception of their affiliate program.

With interest and penalties the outstanding amounts due could be quite substantial – as in millions and millions of dollars.

As with most Tax Law, the Sales/Use tax laws seem to be more complicated than need be.  Problem is that even though most of the legislators are lawyers – they are not TAX Lawyers.

And depending on the economic climate their focus is on raising tax revenue.

It is unlikely that any of the States that currently do not charge sales tax for online sales, where affiliates live and sell to residents in their State, will “pass” on the opportunity to collect tax from Amazon sales in their State.

Amazon collects and remits tax in other jurisdictions.  They have the ability to capture billing and delivery addresses. It would not take much to add a tax rate based on zip code and track each jurisdiction’s tax rate.

It will be very interesting to see how this plays out.  But I suspect that Amazon will eventually give in and start collecting tax on all affiliate sales in each jurisdiction.

After all, they want to retain their claim as the “web’s most popular and successful affiliate program.”