Extraterritorial adventurism: the shortsighted Amazon tax

As I noted back in July with The Future of Freedom Foundation:

The “Amazon” tax neither generates revenue nor creates a level playing field. It does eliminate profitable relationships and drive companies out-of-state, but that hasn’t stopped elected officials from plowing ahead obstinately.

Since then, more evidence has come down against the ploy to tax out-of-state companies—notably from the Illinois Policy Institute (IPI), responsible for the video below, and the Free State Foundation (FSF).

Also known as the “affiliate nexus law,” it applies to out-of-state firms that contract with in-state affiliate marketers. The goal is to collect sales taxes on people who avoid them when they choose to order online, and seven states, including North Carolina, have enacted it.

The latest reports, however, highlight three key problems that ought to compel legislators to either avoid the practice or repeal the relevant legislation.

1. The tax has more-than-dubious constitutionality and may have to be repealed anyway. From IPI:

In 1992, the U.S. Supreme Court ruled that out-of-state retailers who do not have “nexus” – a significant physical presence in a given state – are not required to collect sales tax on purchases made by consumers in that state.

As FSF notes, these firms have no property, stores, or employees in the taxing state, and therefore no nexus. This is also logical, in terms of tax obligation, since these firms do not directly benefit from government services such as police, fire, and utilities.

2. The tax does not generate new revenue and may even reduce tax revenues, since these firms tend to cut ties with affiliates and other firms move out of state—hence the IPI title, “All pain and no gain.” According to Maryland’s comptroller, even after plenty of states have enacted the tax, there is still no certainty of a substantial revenue increase to be found.

[R]eportedly over 200 companies including Overstock.com and Backcountry.com have terminated their affiliates in one or more states that have enacted affiliate-nexus laws.

3. The tax impedes productive business relationships for the in-state affiliates, and, even if not intentionally, reduces prospects for employment and start-up companies. IPI notes that both CouponCabin.com and FatWallet.com simply left Illinois, and the Amazon tax has stifled what had been a blossoming online marketing community in the state.

Fergus Hodgson

Director of fiscal policy studies at the John Locke Foundation, policy advisor with The Future of Freedom Foundation, and host of The Sta...

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