Amazon Laws
Matt Pugh
Professor Bailey
ACCT 6991
August 1, 2014
Table of Contents
Introduction………………………………………………………2
Sales Tax and Nexus……………………………………………..2
Major Court Cases on Sales Tax…………………………………4
Public Law 86-272……………………………………………….7
Conclusion……………………………………………………….8
Bibliography……………………………………………………..9
1
Introduction
Amazon.com is one of the largest electronic commerce companies in the world. Its origins and
current headquarters are in Seattle, Washington, where it originally sold books in the 1990s. It
wasn’t long until Amazon started selling merchandise and in the past few years moved into the
area of tablets, phones, and streaming content.1 By being one of the most profitable E-commerce
companies in the world, Amazon had a target on its back curtesy of numerous state governments.
In a normal sales transaction a person is taxed on the purchase of tangible personal property
because the purchase takes place at a physical location within state lines. The physical location
requirement is synonymous with nexus. In general nexus is a constitutionally sufficient
connection between a state and business.2 Nexus is the most important factor for what is
commonly called “Amazon Laws.” Amazon Laws came about as a result of major litigation and
law enactments. The goal of Amazon laws is to have states establish nexus within their borders
even without physical presence. Two significant court cases are Bellas Hess, Inc. v. Dept. of
Revenue3 and Quill Corp. v. N.D.4 and these cases provided a guideline as to whether Amazon
would have to start collecting and remitting sales tax. The major law enactment was Public Law
86-272 and this provides the statutory nexus requirement for income tax purposes. Amazon
argues that physical presence is the only factor for collecting and remitting taxes, where most
states argue that there are supplemental activities that should cause Amazon to collect taxes.
Sale Tax and Nexus
Most states provide a sales tax for purchases of goods inside state lines, but with internet vendors
becoming more popular, states are looking for ways to tax the sale of goods to people within
their state. “The imposition of a sales tax on an out-of-state Internet vendor for sales transactions
occurring with citizens of the state is unconstitutional on several levels.”5 The commerce clause
2
is the first level of constitutional practice. The commerce clause states that there must be
substantial nexus or physical presence in a state for the imposition of a sales tax. If the only
activity in the state is common carrier like UPS, FedEx, or the U.S. Postal Service, then that is
not substantial nexus. The substantial nexus requirement is the biggest impediment for a state to
tax out-of-state retailers. In Scripto, Inc. v Carson6 a Georgia retailer hired independent
contractors to solicit sales in Florida. The Supreme Court held that these activities were enough
to create substantial nexus in the state of Florida, thus allowing them to collect and remit sales
tax. The Supreme Court said “the crucial factor governing nexus is whether the activities
performed in the state on behalf of the taxpayer are significantly associated with the taxpayer’s
ability to establish and maintain a market in the state for the sales.”7 They decided that
maintaining a market in the state was more than just soliciting sales, they believed that keeping a
steady flow of sales to the state was enough to create substantial nexus.
The Fourteenth Amendment of the U.S. Constitution includes a due process clause stating that a
state shall not deprive any person of life, liberty, or property without due process of the law.8
Relating this to the state’s ability to tax out-of-state retailers involves the retailer to make
minimum contact with the state. The courts held that this does not always involve physical
presence, but as long there was some sort of contact and the state was not trying to deter
interstate commerce. The minimum contact rule is not cut and dry, but it tends to look past the
sole concept of physical presence.
3
Major Court Cases on Sales Tax
The first major court case in 1967 was National Bellas Hess9 in which a Missouri mail-order
company was being sued by the Department of Revenue of Illinois to collect sales and use taxes
from sales to purchasers inside the state. National Bellas Hess did not have any physical presence
in the state, they had no telephone listing or sales agents either. The only form of contact from
the state of Missouri to Illinois was through a common carrier. The state of Illinois wanted
National Bellas Hess to collect and remit sales taxes to the state, but based on the commerce
clause and the due process clause, that is unconstitutional. To be required to collect and remit
sales taxes, there must be a minimum connection to that state. The Supreme Court held that
because National Bellas Hess did not have a physical presence in the state, they would not have
to collect and remit sales taxes to Illinois. The Supreme Court also pointed out that
administrative responsibilities of collecting and remitting sales would be a burden on interstate
commerce. As noted by the date of this case, 1967 was a long way off from common transactions
we see today. The way consumers buy goods today creates a lot of complexity because the
geographic location of an internet purchase is almost unrecognizable.
The next major court case was Quill Corp.10 This case is very similar to the Bellas Hess case in
that it is an out-of-state retailer who sells to state all around the country. Quill Corp. is a
Delaware corporation with offices located in a few states throughout the United States. There is
no physical presence in North Dakota nor do they have any sales agents in the state. They sell
office supplies and equipment through catalogs, flyers, and telephones calls. The state of North
Dakota argued that the Bellas Hess ruling is outdated because the administrative responsibilities
of collecting and remitting sales tax is no longer burdensome like it was in the 1960s. They also
argue that Quill Corp. distributed 24 tons of catalogs and flyers which in their minds constituted
4
an economic presence in the state of North Dakota causing a substantial nexus. In response to
these arguments Quill Corp. stands by the Bellas Hess ruling and uses its lack of physical
presence in the state of North Dakota to free itself from collecting and remitting sales tax. The
Supreme Court rule in favor of Quill Corp. because they believe that the Bellas Hess ruling of
physical presence in the state was still a good law. This is a landmark case for Amazon because
with the lack of physical presence in most states, it can get away without collecting and remitting
sales taxes for those states. However, as time has gone on states are finding new and innovative
ways to tax internet retailers. New York was the first state to impose a sales tax on internet
retailers.
The most recent and most important ruling that effects Amazon and other online retailers is the
New York Supreme Court11 case where the state requires online retailers to collect and remit
sales tax. This is a landmark case that has motivated other states to pass legislation that will
likely lead to litigation in the state and which will be appealed up to the state’s highest courts for
a decision as to whether such laws will apply in those states. Amazon developed an associates
program which allows website owners to link their page to Amazon.com to make sales. The
associates would then be compensated based on a percentage of sales. Also along with this, they
created a referral program where the associates would get referral compensation if they sign up a
new enrollee. This is the basis for New York’s argument. In the associate program’s agreement,
it clearly mentions that the associates are independent contractors and not employees. By looking
at the data, Amazon has thousands of associates in New York and sales from New York
associates to New York customers equal about 1.5% of New York sales.12 Amazon concedes that
New York associates create more than $10,000 in sales. In 2008 New York signed a law stating:
5
“A person making sales of tangible personal property or services taxable under this
article (“seller”) shall be presumed to be soliciting business through an independent
contractor or other representative if the seller enters into an agreement with a
resident of this state under which the resident, for a commission or other
consideration, directly or indirectly refers potential customers, whether by a link on
an internet website or otherwise”13
This Commission-Agreement Provision requires New Yorkers to collect New York taxes by
out-of-state sellers if they were paid a commission. If an out-of-state seller could prove that the
New York residents did not solicit any transaction, then they would be exempt from New York
taxes. Amazon did not take too kindly to this new provision and commenced litigation. Amazon
alleged that this was in violation of the Commerce Clause and the Fourteenth Amendment to the
U.S. Constitution. According to the Complete Auto Transit14 case a state can require businesses
involved in interstate commerce to collect and remit sales taxes. As long as there is substantial
nexus, it is fairly apportioned, doesn’t restrict any interstate commerce, and is equitably
associated to services provided by the state, there shouldn’t be a problem. Substantial nexus can
come from solicitation of sales by independent contractors, if they are on behalf of the out-ofstate business. Since Amazon pays commission to its associates, that was enough to constitute
nexus in the state of New York. Whether or not they had a physical location in New York is
irrelevant because they essentially hired independent contractors in the state to sell on their
behalf. Lastly, Amazon alleges that it is being targeted by the New York state government.
However, this is not true, in fact this law applies to all internet retailers operating inside state
borders. The New York Supreme Court dismissed Amazon’s complaints and held for the New
York Department of Taxation and Finance.
6
Public Law 86-272
Title 15 of the United States Code §381-384 also known as P.L. 86-272 restricts states from
imposing a net income tax on income from within its borders if the activity is solely from
solicitation of orders. P.L. 86-272 is split up into seven sections and codified under §381-384
under Title 15 of the U.S.C.15 Section One16 states that only tangible personal property is
protected under this law. Copyrights, patents, renting, licensing, and other intangible assets are
not immune from this law. Section Two17 defines solicitation as speech or conduct that invites an
order. Section Three18 describes de minimis activities as activities that as a whole only establish
an insignificant connection with the state. Section Four19 lists specific activities that are
unprotected and protected under P.L. 86-272. The unprotected activities are ones that will cause
an entity to be taxed on its net income from within state borders. Some unprotected activities
include repairs and maintenance on property to be sold, collecting current or delinquent
accounts, installation at or after shipment or delivery, conducting training courses, providing tech
services, and much more. Some protected activities include soliciting orders by advertising,
soliciting orders by in-state resident employees as long as they do not maintain an office or place
of business, carrying display samples, providing cars to protected sales people, and much more.
Section Five20 explains the protection of independent contractors. In this law independent
contractors can solicit sales, make sales, and maintain an office and the company who hired them
can still be protected from income taxation.
The rules for sales tax and income are not parallel. Under P.L.86-272 solicitation of sales does
not constitute an income tax but in certain states like New York, a sales tax can be imposed on an
internet retailer for the same type of business activity. As long as online retailers only sell
7
tangible personal property from outside of the state and ships from outside of the state, there will
not be a state income tax. This is mostly because P.L. 86-272 is a federal law that applies to the
states and sales tax laws are determined by each individual state. Each individual state can create
its own nexus laws and make them as stringent as legally possible. The Federal law however, is
very lenient for state income tax purposes and creates an easy nexus requirement for internet
retailers to get around paying state income taxes. The reason for this is because the Federal
government doesn’t want to create a burden from interstate commerce. The Federal government
wanted to prevent instances where minimal income was derived in a state, but yet they still had
to incur the compliance cost of state tax returns which can exceed the amount of income earned.
Conclusion
Amazon and other large internet retailers may have had a window of sales tax collection limited
to physical presence in the past, but the times have changed. Nexus has moved way past the
results of the Bellas Hess and Quill cases. States like New York have passed legislation that
forces collection of state sales taxes if independent contractors are hired to sell on behalf of an
online retailer. Even if there is no physical presence, like an office building, New Yorkers
making affiliate or click-through sales to New York residents must collect and remit sales taxes.
This New York ruling has undoubtedly influenced other states to pursue their own litigation to
create substantial nexus in their state with affiliate and click-through nexus. Unfortunately, not
much has changed with state income tax laws. P.L. 86-272 is the law of the land and it does not
allow states to tax net income if the sole activity is solicitation of sales. This is to prevent a
burden of interstate commerce. The way people buy and sell products has changed immensely
since the original nexus Supreme Court cases and the Amazon Laws are an outcome of changing
times.
8
Bibliography
Amazon.com LLC v. New York Department of Taxation and Finance. Supreme Court, 1st
Judicial District (New York), ¶406-287 (2009).
Letterio, Anne, A state’s way of Circumventing the Constitution: The Unconstitutional Taxation
of Out-of-State Corporations that do instate business over the Internet, 22 Alb. L.J. Sci.
& Tech. 411 (2012)
Lunder, Erika K., and Carol A. Pettit. "Amazon Laws" and Taxation of Internet Sales:
Constitutional Analysis. Rep. no. R4262*. N.p.: Congressional Research Service, 2013.
Minkevitch, Hannah V., To Tax or Not to Tax? That’s Not the Question: The Role of Tax within
the Maturing World of e-commerce, 27 Berkeley Tech. L.J. 705 (2012)
"Overview." Amazon Media Room:. Amazon.com, June 2013. Web. 22 July 2014.
<http://phx.corporate-ir.net/phoenix.zhtml?c=176060&p=irol-mediaKit>.
Sonnier, Blaise M., and M. Cathy Claiborne. "Click-Through and Affiliate Nexus Cases Subject
of Recent State High Court Rulings." Taxes-The Tax Magazine (2014): n. pag. CCH
Intelliconnect. Web. 8 July 2014.
P.L. 86-272
Multistate Tax Commission Nexus Program Bulletin 95-1
9
1
"Overview." Amazon Media Room:. Amazon.com, June 2013. Web. 22 July 2014. <http://phx.corporateir.net/phoenix.zhtml?c=176060&p=irol-mediaKit>.
2
Lunder, Erika K., and Carol A. Pettit. "Amazon Laws" and Taxation of Internet Sales: Constitutional Analysis. Rep.
no. R4262*. N.p.: Congressional Research Service, 2013.
3
Bellas Hess, Inc. v. Dept. of Revenue of Illinois, SCt, 386 US 753 (1967)
Quill Corp. v. North Dakota, SCt, 504 US 298 (1992)
5
Letterio, Anne, A state’s way of Circumventing the Constitution: The Unconstitutional Taxation of Out-of-State
Corporations that do instate business over the Internet, 22 Alb. L.J. Sci. & Tech. 411 (2012)
4
6
Scripto, Inc. v. Carson, SCt, 362 US 207 (1960)
7
Sonnier, Blaise M., and M. Cathy Claiborne. "Click-Through and Affiliate Nexus Cases Subject of Recent State High
Court Rulings." Taxes-The Tax Magazine (2014): n. pag. CCH Intelliconnect. Web. 8 July 2014.
8
Minkevitch, Hannah V., To Tax or Not to Tax? That’s Not the Question: The Role of Tax within the Maturing World
of e-commerce, 27 Berkeley Tech. L.J. 705 (2012)
9
Bellas Hess, Inc. v. Dept. of Revenue of Illinois, SCt, 386 US 753 (1967)
Quill Corp. v. North Dakota, SCt, 504 US 298 (1992)
11
Amazon.com, LLC v. New York State Dep’t of Taxation and Finance, 877 N.Y.S.2d 842, 846 (N.Y. Sup. Ct. 2009).
10
12
Amazon.com, LLC v. New York State Dep’t of Taxation and Finance, 877 N.Y.S.2d 842, 846 (N.Y. Sup. Ct. 2009).
13
N.Y. Tax Law § 1101(b)(8)(vi) (“Commission-Agreement Provision”)
Complete Auto Transit, Inc. v Brady, 430 US 274, 279 [1977]
15
15 U.S.C. 381-384
16
P.L. 86-272(I)
17
P.L. 86-272(II)
18
P.L. 86-272(III)
19
P.L. 86-272(IV)
20
P.L. 86-272(V)
14
10