In their never-ending thirst to raise tax money to pay for their unlimited spending habits, some states have adopted what is called the “Amazon” tax and others are considering it.  This is a tax on online companies that have no connection with a state, but are required to collect and pay sales taxes on sales within the state if the online company has affiliates within the state who earn commissions on in state sales.  It’s called the “Amazon” tax because Amazon is the most well known online business that makes sales using affiliates.

Currently New York, Rhode Island, North Carolina, and Colorado have adopted Amazon taxes.  These laws are unconstitutional and violate the law of the United States expressed in the famous Supreme Court case called International Shoe Co. vs Washington, 326 U.S. 310 (1945) learned by every first year law student since 1945.  This case held that a state cannot tax an out of state business unless the out of state business has sufficient minimum contacts within the taxing state.  International Shoe established the concept of ‘nexus,” which means that an out of state business cannot be taxed within a state unless the out of state business has  minimum contacts within the state such as an office or a single employee that resides in the state or that goes into the state regularly on business.

The Tax Foundation published a detailed article on this topic called “Amazon Tax Signals Business Unfriendliness & Will Worsen Short-Term Budget Problems.”  This article begins:

Contrary to the claims of supporters, Amazon taxes do not provide easy revenue.  In fact, the nation’s first few Amazon taxes have not produced any revenue at all, and there is some evidence of lost revenue.  For instance, Rhode Island has seen no additional sales tax revenue from its Amazon tax, and because Amazon reacted by discontinuing its affiliate program, Rhode Islanders are earning less income and paying less income tax.

When I first heard about this type of tax I predicted that the result would be less tax revenue for the states that adopt it because the online businesses would terminate their affiliate programs with affiliates who reside in the taxing states with the result that the affiliate would no longer earn revenue and the taxing state would lose the income tax revenue on the lost income of the affiliate.  The Tax Foundation reports supports my earlier prediction.  It’s the law of unintended consequences that results from all legislation.  Frequently laws have an affect that is the opposite of the legislative intent.

Update:  See the interesting post made by the Tax Foundation on March 10, 2010, about the reaction to its Amazon tax paper and on these significant developments:

• why Colorado’s new tax is considered an Amazon tax
• Amazon announced it is terminating its affiliate contracts in Colorado
• Colorado will collect less tax revenue now because it lost the income tax revenue that would have been paid in the future by the Colorado affiliates.