Online Retailers Fight Back Against Attempts to Tax Internet Sales

An excellent article in the December issue of Budget & Tax News describes efforts by states such as New York and Rhode Island to tax online retailers like and—and how the retailers are fighting back. Some state governments, desperate to squeeze any additional ounce of blood from taxpayers and businesses to fill state coffers during the economic downturn, are once again looking to tax Internet-based businesses, despite repeated declarations by the courts that such efforts are unconstitutional. The online retailers have countered by filing lawsuits and dropping affiliate advertisers in states that try to impose laws that claim that the presence of local, independent Internet advertisers, used by the online retailers, in their states means that the retailers themselves have a physical presence in the state, and thus must collect state sales taxes.

According to the article,

Rhode Island is the latest state to join in the effort, following a 2008 New York law defining any New York-based third party who collects a commission on sales to an out-of-state merchant through referrals, specifically “clickthroughs” from Web site advertising, as an in-state “nexus” for that merchant, leading to lawsuits from Internet retailers.

In their lawsuits, Amazon and both say they can’t determine whether affiliates are actual legal residents of New York or whether their Web sites are hosted within the state, nor can they control the affiliate Web sites or determine whether a specific ad is a direct or indirect solicitation for business.

“We understand that many states have worked themselves into a serious budget crisis and thus are looking for any way to increase their revenues,” said Jonathan Johnson, president of online retail firm “However, passing laws that are unconstitutional is not the way for them to solve their problems. Rather than try to make companies like their sales tax collectors, they should focus on ways to reduce their budgets. That’s what businesses do when they are in tough times.”

As Mr. Johnson notes, attempts to impose taxes may have unintended consequences, as businesses avoid doing business in the state, leading to even fewer state revenues:

“These types of laws will have a negative impact on state revenues. and others like us will continue to terminate our affiliate advertisers in every state that passes affiliate nexus legislation. This will mean these small businesses—the affiliate advertisers—will suffer a loss income, and companies like will still not be collecting taxes for the states.”

The article continues:

Overstock and Amazon dropped hundreds of affiliate advertisers in Rhode Island and several other states this summer as the states moved to impose taxes on sales generated by affiliate advertisers. The companies had already dropped thousands of affiliate advertisers in New York after that state imposed its taxes in 2008.

Yet Johnson sees little direct impact on his firm.

“It won’t affect too much. Consumers find affiliate advertisers regardless of where they are based. We did not experience a significant change in affiliate sales when we terminated our [approximately] 4,000 New York-based affiliate advertisers. What states that pass these laws are really doing is forcing business [to move] outside their borders.”

The U.S. Supreme Court ruled in its 1992 Quill Corp. v. North Dakota decision that forcing out-of-state merchants to comply with thousands of state and local tax jurisdictions would violate the Commerce Clause of the U.S. Constitution and represent an unconstitutional barrier to interstate commerce.

Governments at all levels are just as desperate for cash as many of the taxpayers that pay for them, but sound economic theory and hundreds, if not thousands, of years of historical experience should have taught us by now that seemingly endless borrowing, taxation, and bailouts are not the solution to economic ills. What is needed is to free the engines of the economy—private businesses, entrepreneurs, and workers—by allowing them to retain as much of their money as possible so that they may best invest, save, or spend it as their needs and wants dictate. To that end, policymakers should be reducing taxes, regulations, and the size of government generally, and focus on improving the business climate by simply getting government out of the way. While this will not perpetuate the myth that government action is needed in every aspect of our lives to solve every problem (oftentimes caused by other previous government actions), it will allow productive activity to return, right the economic ship, and increase individual liberty.