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“Amazon Tax” Could Drive Businesses Out of California

California Governor Jerry Brown signed a new tax law into effect on Wednesday designed to bring revenue to the severely financially strapped state.  Called the “Amazon tax,” the measure requires out-of-state retailers (all of them, not just Amazon) to pay taxes on sales to customers within the state of California. 

Earlier on Wednesday, Amazon sent notices to its affiliates in the state warning them that if the measure did become law, it would be forced to terminate its contracts with them because it's their presence in California that makes Amazon subject to the tax.  Amazon has reacted similarly in other states where such taxes have been imposed.

As with other struggling state governments, California is desperately searching for new sources of revenue.  Proponents of the “Amazon tax” claim it will bring in close to $320 million in revenue per year.  But, based on results of similar moves in other states, the move may not work out so well.  1992, the Supreme Court ruled in the Quill vs. North Dakota case that online sales are not subject to taxation unless the seller has a physical presence inside the state imposing the tax.  That ruling gives Amazon and other retailers an out: stop allowing affiliates in California to sell on the site, and avoid the tax.

In its notice to affiliates, Amazon called the new tax “unconstitutional and counterproductive.”  The company said that the law was supported by big-box retailers, mostly outside of California, in an attempt to harm the affiliate advertising programs of their competitors. 

In other states, such taxes have backfired, according to data provided by the Tax Foundation, a group that opposes the taxes.  The group noted that tax revenue has actually declined in North Carolina and Rhode Island after “Amazon taxes” were enacted.  The reason for this is that a number of large retailers, who do some business online but also run physical retail locations, have fled to other states to avoid the tax.  Some insiders have estimated that the "Amazon tax" could drive as many as 25,000 businesses from the state.