Mary Bernard
Mary Bernard
The Spread of the ‘Amazon’ Tax

New York was the first state to impose the so-called “Amazon” sales tax on online retailers and now other states are following that lead.

July 30, 2009
by Mary Bernard, CPA/MST

In an effort to balance the budget for fiscal 2009, New York began imposing sales tax on online retailers if any New York-based Web site earns referrals from that retailer and the retailer collects at least $10,000 in revenue from these affiliates in state. This new law targeted businesses like Amazon and Overstock who regularly use affiliate referral programs in many states across the country. The result of this bill could be that many online retailers may have to collect sales tax on purchases made to New York residents even if they have no employees or business locations in New York.

This concept seems to be contrary to the position held in a 1992 Supreme Court case, Quill v. North Dakota in which the Court determined that out-of-state retailers could not be required to collect sales tax where they did not have a physical presence. Physical presence could be established through a base of operations or the employment of personnel in the state. The Court established the reasoning that being required to track sales for — and comply with — over 8,000 taxing jurisdictions in the country would impose an unfair burden on interstate commerce. This has been the controlling law in the sales tax arena for the last 17 years. Although this time period has seen a marked increase in the volume of Internet retail business, the Quill case has not yet been re-litigated to change the existing interpretation.

In opposition to this new sales tax, Amazon has challenged the position that the existence of an internet affiliate is sufficient to constitute a “physical presence” as required by Quill. Overstock has filed similar suit in opposition to the New York law, which became effective a year ago. Both cases are still pending.

‘Amazon’ Tax Effect on States

As states are challenged to balance their budgets, they are turning to out-of-state retailers to generate additional revenue. Although the “Amazon” tax is viewed as an attempt to level the playing field between online and bricks-and-mortar establishments, the expected impact may not be the ultimate result.

Several states are investigating this approach to sales tax with differing results. Similar tax proposals in North Carolina and Rhode Island resulted in Amazon discontinuing its Amazon Associates referral program in those states rather than collect sales tax. Salt Lake City, UT-based Overstock quickly followed by eliminating its affiliate referral programs in those same states, as well as in Hawaii. Shortly thereafter, Blue Nile, a Seattle-based jewelry retailer, ended its affiliate program in Rhode Island. The result of these large retailers’ actions will negatively impact the revenue of the former affiliates in those states, as well as deflate any projected sales tax revenue these states were expecting to generate with this sales tax law. California Governor Arnold Schwarzenegger ultimately vetoed similar legislation after affiliate programs were being canceled to avoid the sales tax collection requirements.

Other states, like Connecticut, are still considering implementing this interpretation. Amazon has contacted the state to voice its opposition and to warn the state of the resulting impact this could have, if the legislation is passed. Maryland, Minnesota and Tennessee considered this legislation but ultimately rejected the proposal.


Although the states view this law as “closing a loophole,” theoretically, in most states it is really just a shifting of the burden of remitting the tax. Most states imposing a sales tax already require its residents to remit a use tax on any taxable items purchased out of state without paying appropriate sales tax at the point of purchase. Generally, the use tax is self-assessed, difficult to monitor and almost impossible to enforce. With these proposals, states are now attempting to shift the burden to retailers shipping into their state, regardless of the lack of physical presence within their borders, due to their inability to properly monitor the use tax at the consumer level.

The unintended result of the imposition of the so-called “Amazon” sales tax collection requirements by online retailers could be a shift in the marketplace focus of the online retailers to the states not inhibiting their marketing efforts through the burdensome collection of sales tax.

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Mary F. Bernard, CPA, MST is a Tax Principal and Director of State and Local TaxServices at Kahn, Litwin, Renza & Co., Ltd. in Providence, RI.