The Amazon Tax and the Affiliates Amendment

by Ari Armstrong | 8:56 am, March 12, 2010 | Comments Off

Amazon dropped its Colorado Associates because the company reasonably expects that it is only the Associates program which may grant Colorado authority to subject the company to Colorado tax laws.

Various people have wrongly argued that, because the amended bill dropped language about "affiliates," Amazon would have been subject to the requirements of the law with or without its Associates program. However, what matters is what the federal courts regard as establishing a relevant presence in Colorado. The federal government, not the Colorado legislature, has authority to regulate interstate commerce. I have written about this matter at greater length in my previous article, "Stop the 'Amazon Tax!'"

Here I explore the language of Colorado's Amazon Tax in greater detail.

Originally, the bill said that "if a retailer enters into an agreement with an affiliate," the "retailer is deemed to be doing business in this state." In other words, the bill explicitly claimed that affiliate programs such as Amazon Associates permit Colorado to subject such retailers to Colorado tax laws.

The amended bill drops the language about affiliates. How, then, does the bill try to subject Amazon, an out-of-state businesses, to Colorado's tax laws?

The bill amends Colorado Statute 39-26-102(8) to state, "'Retailer' or 'vender' means a person doing business in this state, known to the trade and public as such, and selling to the user or consumer, and not for resale."

Previously the law defined a "retailer" or "vender" as "a person doing a retail business."

Existing statute (cited by the bill) already defines the meaning of "doing business in this state." 39-26-102(3) states:

"Doing business in this state" means the selling, leasing, or delivering in this state, or any activity in this state in connection with the selling, leasing, or delivering in this state, of tangible personal property by a retail sale as defined in this section, for use, storage, distribution, or consumption within this state. ...

By these definitions, then, Amazon is "doing business in this state" by selling and shipping stuff to Colorado consumers.

The bill further amends Statute 39-21-112 by adding a new subsection. Subsection (3.5)(b) states: "For purposes of this subsection (3.5), 'retailer' shall have the same meaning as set forth in section 39-26-102(8)." As we've seen, that is the part amended to define a "retailer" as "a person doing business in this state."

Then the bill cashes in on these definitions in 39-21-112(3.5)(c)(I), which states, "Each retailer that does not collect Colorado sales tax shall notify Colorado purchasers that sales or use tax is due on certain purchases made from the retailer and that the state of Colorado requires the purchaser to file a sales or use tax return."

The rest of this subsection defines the penalties for noncompliance, specifies that notifications "shall be sent separately to all Colorado purchasers by first-class mail," and specifies that the retailer must also submit a report to the state.

In other words, the Colorado law attempts to completely obliterate any "physical presence" standard in terms of subjecting out-of-state businesses to Colorado's tax laws. This means that the Colorado legislature is attempting to utterly disregard Article I, Section 8, of the U.S. Constitution, which grants the federal government sole authority to regulate interstate commerce.

Obviously, Amazon knows that the Colorado legislature lacks the authority to impose its tax law, absent federal approval. Whether or not the Colorado bill mentions "affiliates," federal courts are likely to require some sort of relevant "presence" in Colorado before the state can impose its tax laws on out-of-state businesses. The reason that Amazon dropped its Associates in Colorado is precisely to remove such a "presence."

What should we make of the bill's section on "a controlled group of corporations?" Here's what the bill says on that matter:

Commencing March 1, 2010, if a retailer that does not collect Colorado sales tax is part of a controlled group of corporations, and that controlled group has a component member that is a retailer with physical presence in this state, the retailer that does not collect Colorado sales tax is presumed to be doing business in this state. For purposes of subparagraph (II), "controlled group of corporations" has the same meaning as set forth in section 1563 (a) of the Federal "Internal Revenue Code of 1986", as amended, and "component member" has the same meaning as set forth in section 1563 (b) of the [same code].

So now not only do we have to see how the new law meshes with existing Colorado statutes, but we have to see how it meshes with IRS code. (Those who wish to peruse the IRS's delightful code may find it here.)

The text quoted above is offered by the bill as an amendment to 39-26-102, which, as we've seen, pertains to definitions. Notice that the new section does NOT alter the other definitions about "doing business in this state."

Notice something else important about the new definitional language: the bill is not claiming that ONLY "a retailer that does not collect Colorado sales tax [and] is part of a controlled group" and that "has a component member that is a retailer with physical presence in this state" is "doing business in this state." That is merely one explicitly defined example. Obviously the King Soopers down the street is also "doing business in this state." As explained above, the bill also declares that out-of-state companies such as Amazon are "doing business in this state" when the sell and ship stuff to Coloradans.

What is exasperating about this discussion is that I only just received an email claiming, "This bill has nothing to do with affiliates, as far as I can tell. ... The regulations apply to anyone from Colorado making a purchase through Amazon, regardless of whether or not they come through an affiliate."

Such commentators apparently believe that Colorado legislators are above the U.S. constitution and may impose tax laws on out-of-state businesses at will. Amazon knows better. Amazon knows that federal courts may view the Associates program as creating a relevant "presence" in Colorado, thereby granting Colorado the authority to impose tax laws on Amazon. Therefore, Amazon removed that "presence." (I would have the courts turn to a tight standard of "physical presence" implying a store front, but Amazon cannot count on the courts to do that.)

Somebody left a comment on my previous article wondering why Amazon did not wait to drop its Associates until the company fights "this out in the courts."

I responded:

[I]t is to Amazon's advantage to drop the Associates right now, rather than wait for a potential court battle to play itself out. To see why, note what Amazon says about its New York court battle, which remains in appeals:

"Effective June 1, 2008, Amazon.com LLC will begin collecting sales tax on items shipped to destinations within the State of New York as New York has enacted a new law requiring out-of-state sellers to collect and remit sales tax based on advertising. Amazon has filed a lawsuit challenging the constitutionality of this provision. However, as required by the law, we must still begin collecting New York sales tax beginning on that date."

In other words, Amazon wants to make sure that it does not have to comply with Colorado's onerous tax provisions while a potential court battle plays out.

The Amazon Tax is unjust and unconstitutional, and it should be repealed.

See RepealTheAmazonTax.com.

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