Connecticut and the ‘Amazon Tax’: A Natural Fit

March 25, 2010

Drenched-in-denial pols are adept at using every tool available to wish away Connecticut’s dire fiscal condition. They’ve raised corporate and income taxes, adopted too-rosy economic projections, grabbed federal cash, borrowed billions, “securitized” future funding sources, and drained the budget reserve.

What’s on deck? The “Amazon Tax.”  

Since the dawn of Internet shopping, state governments’ revenue-mongers have seethed that most online purchases are not subject to sales taxes. A 1992 U.S. Supreme Court decision, Quill Corp. v. North Dakota, held that there is no obligation to collect tax on items bought by customers living in states where vendors do not have stores, offices, warehouses, or salesmen. The ruling was founded on the Commerce Clause of the U.S. Constitution, which grants the federal government sole authority to regulate interstate trade. Thus, Connecticut cannot force a Texas-based outlet to place a 6 percent levy on orders shipped to the Nutmeg State. (At income-tax time, residents are legally bound to pay a “use tax” on products they obtained out of state during the previous year. The people who actually do are as numerous as the number of drivers who obey the Merritt Parkway’s speed limit.)

Quill made a lot of sense. Since the New Deal, the Commerce Clause has been used to justify never-ending federal meddling in what should be purely private economic exchanges. But its original intent, to preclude state-level protectionism that promised to stifle growth in the early Republic, was sound.

Unfortunately, justices left the door open for the day when sellers would be required to remit taxes to states they have no connection to, and from which they derive no “public services.” Congress “has the ultimate power to resolve” the issue, the High Court ruled, and fedpols were “free to decide whether, when and to what extent the States may burden interstate mail-order concerns with a duty to collect [sales] taxes.”

In the 1990s, Washington was comfortable with the status quo. The states? Not a chance. They hashed out the Streamlined Sales and Use Tax Agreement (SSUTA), an elaborate scheme to “simplify sales and use tax collection and administration” in order to ensure “that all retailers can conduct their business in a fair, competitive environment.” Translation: We’ve found a way to get our “missing” revenue.

By signing on to the SSUTA, states agree to accept “harmonization” rules, including the removal of exemptions based on price. A “level playing field,” SSUTA supporters believe, combined with sophisticated software that identifies buyers’ sales-tax rates, will resolve complexity issues, and justify congressional approval of the compact.

In a word, the SSUTA is a bust. It’s a decade old, and only 23 states have passed legislation to bring their states into conformance with the agreement’s provisions. (Deep-blue Connecticut isn’t one of them.)

And that brings us to the Amazon Tax.

Two years ago, New York found a loophole it thinks frees the state from Quill’s restrictions. Under the company’s “Associates Program,” any approved website can post Amazon advertisements. If someone visits your website (be it a blog, business, or nonprofit), then clicks on an Amazon ad that ultimately leads to a sale, you get a royalty.

Unwilling to kick their overspending habit, pols and revenucrats got to thinking: Aren’t a lot of those Amazon-affiliated websites located in the Empire State? And since they are, doesn’t that mean -- under what the Tax Foundation calls “a nebulous, arbitrary standard of ‘economic presence’” -- that Amazon can be forced to collect sales tax?

Legislators decided it was worth a try. They approved what’s now known as the Amazon Tax. (The e-superstore, headquartered in Seattle, is fighting the law in court, claiming it is “invalid, illegal, and unconstitutional” under both the U.S. Constitution and Constitution of the State of New York.) The New York Times cheered. North Carolina and Rhode Island enacted similar measures.

A bill to implement the Amazon Tax is before the Connecticut General Assembly’s finance committee. If solons approve the tax -- either this legislative session or during one of the multiple special sessions sure to come as the budget crisis drags on -- Amazon might not file a lawsuit. It could do here what it and other e-commerce giants have done elsewhere, and eliminate their advertising-affiliate programs.

The Amazon Tax is unconstitutional. It hurts businesses, charities, and bloggers. Many economists say its value as a revenue-raiser is dubious. It distracts Connecticut’s budget debate from the urgent need to reduce expenditures.

The Amazon Tax is a disaster in every conceivable way. Prediction: Sometime soon, it will pass the legislature by a wide margin.

D. Dowd Muska is a writer, commentator and lecturer. His website, www.dowdmuska.com, is not a member of Amazon’s Associates Program.

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