Sales tax on online retail sales has been a confusing area of the law since the earliest forays into internet sales.  Recent attempts by the states to aggressively interpret the meaning of a business “nexus” with the state (which is the basis of a state’s claim to sales tax jurisdiction) have been fueled both by the maturity of the internet retail market and by the state budgetary crises of this and recent years.

In 2008, New York State enacted legislation which may still be the broadest attempt yet to collect sales taxes from out-of-state vendors, basing its legal argument on the networking, linking and affiliate relationships common to many online vendors and particularly, to Amazon.com.

The states may very well be reacting to Amazon’s own aggressive tactics.  In “Sorry, Shoppers, but Why Can’t Amazon Collect More Tax?” (NY Times, 12/26/09), Randall Stross argued that Amazon exploits a tax technique called “entity isolation” to avoid having to collect sales tax in all but 5 of the 18 or more states in which it (and, importantly, its subsidiaries and affiliates) does business through a physical presence such as a warehouse, distribution center, administrative office, or call center.

Stross’s Times colleagues have lampooned Amazon’s policy argument against having to collect state and local taxes on its estimated $22 billion in sales, an argument which might be distilled to “it’s too complicated”.  Wrote Saul Hansell in the “Bits” Blog 2 years ago (“Amazon Plays Dumb in Internet Sales Tax Debate”, NY Times 2/13/08):

“[I]t is certainly an unwieldy mess of rules. But this is the sort of problem that is handled by technology: there is a finite set of variables — location, goods purchased, amount, date, whatever else — and a set of rules to come up with a tax rate. When you look at all the things Amazon does every day — such as the recommendations it offers about goods to buy, or the way it optimizes its warehouse operations — figuring out sales tax looks like a job for the summer intern.”

Stross quotes Amazon founder Jeff Bezos from a 2000 speech, in which Bezos acknowledged the basic premise of state sales tax collection: “You have to charge sales tax to customers who live in any state where you have a business presence.”  Different states charge different rates of sales tax and apply different interpretations (often, widely different) of what is a “business presence”.  Online retailers, too, vary widely in their compliance or more accurately, their view on whether their businesses are subject.

Amazon has, to this point, argued that its sales business directly operates only in 5 states (Washington State and 4 others where it has distribution centers).  So for example, its division which developed and manufactured the Kindle is in California, but structured as a separate legal entity subsidiary with no sales operation.  In Amazon’s view, this “entity isolation” distinguishes it from, say, the online sales of BarnesandNoble.com.  Barnes & Noble collects tax on sales in California and New York and elsewhere based on the physical presence of its stores in those states.

As mentioned above, New York State has taken exception to this argument and is attempting to force Amazon to collect sales tax.  New York argues, essentially, that Amazon’s claim of no business “presence” in New York State is ludicrous in the totality of the circumstances.  In simple terms, New York points to the massive network of “affiliate” sellers of books and other products operating under the Amazon umbrella, many or most of whom sell exclusively or nearly exclusively through Amazon.

Stross reports that Amazon has filed legal challenges to New York and the issue is therefore unsettled.  What is not unsettled is the aggressively upward trajectory of state efforts to collect revenue from online commerce, wherever it is physically located, based on the incidence and (as clearly in the case of Amazon) the volume of traffic in the particular state.