Business

What the Amazon tax ruling means for the future of e-commerce

Above: Amazon's Jeff Bezos at a 2010 event.

Image Credit: Jurvetson/Flickr
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Deborah Sweeney is the CEO of MyCorporation.com.

Inaction in Congress has already caused quite a few problems recently. It seems its lack of a stance on the so-called “Amazon Tax” — an initiative that would require larger online retailers to collect state sales tax on all purchases — has been a real headache for state courts.

So far there is no federal law allowing states to force online retailers to collect sales tax. Customers are supposed to send in the sales tax for any purchases made online, but very few do. Many state governments are upset about this and want to force online retailers to collect. In response to this, Amazon and other online retailers have blazed a state-by-state warpath to challenge these new laws.

For the most part they haven’t had much luck. However, the Illinois Supreme Court voted six-to-one to throw out a law that forced online retailers with in-state affiliates to collect sales tax on Illinois purchases. But what does this new ruling mean for the future of e-commerce?

The Internet Tax Freedom Act

The Illinois Supreme Court’s decision is mainly based on a law passed back in 1998 that was meant to help spur the growth of the Internet — the Internet Tax Freedom Act. For the most part this act just kept authorities from enacting any Internet-only taxes, and it did not exempt sales made online from taxation. It did, however, ban “discriminatory taxes on electronic commerce.”

When taken with the Quill decision — a 1992 case that established that only retailers with a physical presence in a state can be required to collect state sales tax — the Illinois court felt that the state was discriminating against retailers that sell through links on Illinois websites.

Amazon, for example, used to run an affiliate program for Illinois businesses, entitling the affiliate to a percentage of sales made through the site. This affiliate program, however, gives Amazon an in-state presence, and so Amazon pulled the program from Illinois so it wouldn’t have to collect sales tax. Meanwhile retailers who only advertised in Illinois did not have to collect anything. The ITFA, however, expires in November 2014, and while it could be renewed, its lapse might invalidate the court’s decision.

Will the Supreme Court step in?

Amazon has already petitioned the Supreme Court to review a similar case it lost in New York. The Supreme Court may feel compelled to actually review these cases now that the highest courts in two different states have reached opposite decisions. The Quill decision gave Congress power to enact legislation allowing states to enforce collections. Though the Senate passed a law, the Marketplace Fairness Act, that would allow states to do this, it is very unlikely that any major tax legislation will pass through the House. All of this points to the Supreme Court intervening.

The future of e-commerce in America

If this fight has shown us anything, it is that a line has to be drawn in the sand. The rules are far too ambiguous, and while it is likely that only online retailers with remote sales in excess of $1 million will be affected by any changes to the law, smaller businesses are impacted when Amazon pulls from affiliate programs. The Performance Marketing Association, the lobbying group that originally filed the Illinois suit, pointed out that in Illinois one-third of affiliates downsized to stay in the state, with the other two-thirds either left the state or went out of business. Amazon already collects sales tax in 13 states, and plenty of other states want their slice of the pie. If the e-commerce industry is going to continue to thrive and grow, it needs to know what laws it has to contend with. Otherwise, the uncertainty will scare future retailers away from an otherwise very lucrative market.

Deborah Sweeney is the CEO of MyCorporation.com, an online legal filing services for entrepreneurs and businesses. Follow her on Google+ and on Twitter @deborahsweeney and @mycorporation.

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