"Amazon" Laws Backfiring

When the New York trial court ruled that there was no reason to dismiss the complaints of Amazon and Overstock.com about the law enacted in NY in April 2008 (see prior post and here), a few states introduced similar legislation to grab certain remote vendors to get them to pay use tax.

For example, Rhode Island enacted a law similar to that in NY only the threshold for when a vendor is subject to sales/use tax collection is when it has $5,000 of sales in the prior four quarters rather than $10,000 as used in NY. The Rhode Island tax agency issued guidance on this new rule that is effective July 1, 2009 - here.

However, Amazon won't be subject to this new rule because it canceled its arrangements with its RI associates. The law only applies to a remote vendor if they have arrangements with in-state affiliates who have a link on their website and earn commissions if someone clicks on the link and places an order with the vendor. If the link is purely for advertising, the vendor is not subject to the rule (the rationale for the NY and RI laws is that if the affiliate is making money tied to a purchase from the vendor, they are helping to make sales causing the vendor to have a presence in the state).

A June 30, 2009 article in the Wall Street Journal about Amazon dropping its RI affiliates includes a statement from an affiliate that about 2,000 RI affiliates pay about $3 million in state income taxes on their commissions (Fowler, Amazon Drops More Affiliates to Avoid Tax). Assuming that any vendor subject to the new rule cancels its affiliate arrangements, RI has lost both the income tax from the commissions and a possibility of collecting use tax.

This all seems like a waste of time. A law should not be this easy to get around. Why not use existing law to determine if a "remote" vendor has a physical presence in the state? Why not spend some money to educate consumers about their obligation to pay use tax on taxable purchases from remote vendors? A state could buy ads on the Internet about this. A state could include a table for estimating use tax so people do not need to keep records on their purchases for which they were not charged sales tax.

So, it sounds like RI has lost some income taxes (the state(s) where Amazon pays income taxes will make this up because Amazon's income goes up by the amount of commissions no longer paid in RI (it unlikely lost many RI sales because Rhode Islanders can find Amazon without a link on someone's website and the affiliates generate only a minor amount of sales for Amazon)).

It is past time to spend the time of legislators and state tax agencies in a more productive way than copying the NY "Amazon" law.

What do you think?