Content Matters

Amazon (NASD:AMZN) has sued New York State claiming that a newly passed law governing sales tax for affiliate programs is unconstitutional and that it unfairly singles out a single company (Amazon).

The law was originally proposed by former Governor Eliot Spitzer before he was otherwise distracted. It was signed into law last week by new Governor David Paterson as part of the budget bill. The State estimates that it would raise approximately $50 million per year in tax revenue.

At the heart of the bill is Amazon's affiliate sales program. States have been eyeballing Internet sales tax in recent years, trying to figure out how to get a piece of it. But, it's been off limits until now. New York lawmakers believe that they found a way around it by suggesting that through its affiliate program, Amazon in essence creates a tax nexus in every state in which it has even a single affiliate. And, precedents enable states to collect sales tax on any sales in their state by companies which have such a nexus, even if the sales are not made through that affiliate.

This, of course, is nonsense. Tax nexus laws were originally written for brick and mortar businesses. So, if Barnes & Noble has stores in New York, they can't avoid having their customers circumvent the tax by buying online. But Amazon has no brick and mortar presence. The original rational behind sales taxes were that they would pay for the local services provided to those stores - police protection, street cleaning, roads and parking, etc. Amazon doesn't use those services and the presence of an affiliate program doesn't change that. As Amazon points out, an affiliate program is simply an alternate means of marketing. To suggest an affiliate program constitutes a physical presence in the state would be like suggesting that someone who buys banner ads on a New York State-headquartered website would have a local presence. But, the attraction of tax dollars plus a desire to help local businesses obviously drove policy in this case.

I hope the courts overturn the law and do so quickly. Tax nexus policy can be a slippery slope. There are other states who have taken aggressive postures in this area (Maryland and Massachusetts come to mind) and it's not good for business nor does it help the state attract business. If Congress wishes to apply sales tax to all Internet purchases, that's their prerogative. But to base tax collection on the marketing programs an ecommerce company uses makes no sense at all.