Louisiana recently adopted what is commonly known as an “Amazon law.”
Representative Walt Leger, III’s Act 22 – effective March 14, 2016 – allows Louisiana to tax businesses with no physical presence inside its borders.
More specifically, Act 22 requires out-of-state retailers with in-state contract affiliates – individuals or businesses that refer potential customers to the seller – typically by linking to their website – to remit taxes on sales made to Louisianans.
The question of whether states can or should tax businesses when their only in-state presence is an internet link on an affiliate’s website has been a point of controversy in recent years.
First and foremost, there are constitutional questions regarding the validity of “Amazon laws.” The Constitution prohibits states from taxing businesses without a sufficient nexus – connection – between them. The standard for nexus was set in a 1992 Supreme Court case, Quill vs. North Dakota, where the Court found the Commerce Clause requires a business’ physical presence inside a state.
While Congress has the power to diminish the physical presence requirement, attempts to do so, like the Marketplace Fairness Act – federal legislation that would reduce the physical presence standard for nexus and allow states to tax businesses outside of their borders – have been met with opposition for several reasons, and thus are not yet law.
“Amazon laws” are basically an attempt to get around Congress and the Supreme Court by stretching the meaning of physical presence. Of this, the Tax Foundation notes:
‘The Amazon tax is just the latest in a series of efforts to eliminate the long-standing “physical presence” standard and replace it with a nebulous, arbitrary standard of “economic presence.”’
In addition, many have argued that “Amazon laws” create an unduly burdensome business requirement on national retailers.
Many proponents of “Amazon laws” claim they are necessary to level the playing field between brick-and-mortar shops, which must collect sales taxes, and internet retailers, which often do not collect taxes.
However, while brick-and-mortar shops are only responsible for knowing the tax requirement in their jurisdiction, “Amazon laws” require internet retailers to keep up with tax requirements in each of their clients’ jurisdictions.
The more states with “Amazon laws,” the more difficult and expensive this burden becomes, as there are thousands of state and local tax jurisdictions across the country. If an internet retailer accidentally under-taxes, they risk facing serious penalties. If an internet retailer accidentally over-taxes, they risk facing class action lawsuits.
In a recent Wall Street Journal op-ed, president of the American Catalog Mailers Association and co-founder of the True Simplification of Taxation coalition Hamilton Davison advised remote retailers:
“Online and other remote retailers must stand together. Now is the time to fight the troubling and unconstitutional efforts of…states to impose their own tax regimes on businesses everywhere.”
Some internet retailers have even elected to challenge the legality of “Amazon laws,” so it bears watching to see whether Louisiana’s bid for increased tax revenue holds up to legal scrutiny.