Between Amazon notifying and then terminating North Carolina affiliates [see also this Wall Stree Journal article], California reviving the anti-affiliate tax, Hawaii lawmakers sending a similar bill to the governor [more here], and Rhode Island considering going the same route [see this comment], we read and hear that taxes like these are “unconstitutional” (Amazon uses the word in every e-mail they send on the topic, Overstock wrote about it back in May 2008, numerous affiliate marketing blogs and forums are agreeing too). But what exactly makes such a law unconstitutional?
Short Answer: The Supreme Court once ruled that “you cannot hold a catalog company responsible for collecting out-of-state sales tax” [source].
Long Answer: Looking back at the 1992 Quil Corporation versus North Dakota case we see that back then the Supreme Court held that taxing an out-of-state business violates the “Due Process and Commerce Clauses of the Constitution” which “prohibit a State from imposing the duty of use tax collection and payment upon a seller whose only connection with the State is through common carrier or the United States mail”. Therefore, it is being said that an e-tailer must have a physical presence in the state to be required to collect a sales tax; and since the decision that set a precedent was made by the Supreme Court, it is also being held “that only Congress, through legislation, could delegate broader powers to the states” [source].
Does the above-quoted precedent apply in case with merchant-affiliate relationship? Reading through the North Carolina “Nexus Clarification and Click-Throughs” posted here the answer may very well end up being negative. Will it help states raise the money that they are looking to raise? The answer is definitely negative [more here].
Maryland, Minnesota, and Tennessee voted against pursuing such legislation.
You may read more about this tax by following the “affiliate sales tax” tag in my blog.
Thanks for the mention. 🙂
Patrick
You’re welcome, Patrick, and thank you.
The root reason why such taxes are in fact Unconstitutional is found in the Constitution itself, First you need to understand that the US Constitution IS the Supreme Law of the Land; Article 6. Second; Article 1 Section 9 clearly states that NO Tax or Duty shall be added to any article exported from any State. That is the LAW! If it crosses a State line it may not be further taxed, PEROID.
But some States apparently believe they have an exemption from the law. You have every right to confront them if they try to force you into paying taxes not owed, taxes not legally allowed. If you find yourself being asked to do such a thing simply ask them for a copy of their exemption. If they can not produce such a document, and they can’t because no such exemption exists, you don’t have to pay them a penny.
If you look into the origins of the Use Tax you’ll find it comes from a [misinformed?] Judge, he stated that while the law is clear you can’t add/collect [sales] tax across State lines, it doesn’t say you [the State] can’t charge a Use Tax, well he was half right, in that it doesn’t say that, but, it also doesn’t say that you can. A rose by any other name applies, you can call it anything else you want to, but it still smells the same.