What Makes Affiliate Tax (aka “Amazon Tax”) Unconstitutional

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.

Tags: affiliate sales tax, amazon tax