Amazon Sales Tax: The Battle, State by State
NEW YORK (TheStreet) — Amazon(AMZN) is in the midst of a heated battle with states over whether it should be required to collect sales taxes. — While this has been an ongoing debate, the dispute recently escalated as states look to recover deficits coming out of the recession.
Context & Ripple Effects
This fight has been running since 2008, when Amazon challenged New York's "Amazon tax" as unconstitutional rather than collect sales tax there — a legal stance that set the template for every state since. What changed by mid-2011 is the fiscal backdrop: post-recession deficits have turned a doctrinal dispute into a budget line item, so more legislatures are writing affiliate-nexus laws that make Amazon taxable by statute.
The escalation is already costing intermediaries — per the syndicated reporting, Amazon cancelled its Connecticut website sales agreements rather than operate under the new state tax, meaning local affiliate publishers lost the relationship overnight.
First-order effects
- Amazon must choose state by state between collecting tax and severing its in-state affiliate programs, and in Connecticut it chose severance — cutting off commission income for local website operators who referred sales.
- States enacting these laws gain a new, contested revenue stream aimed squarely at closing deficit gaps coming out of the recession.
Second-order effects
- Every state that passes an affiliate-nexus law forces the same binary choice elsewhere, pushing other online retailers with in-state referrers into identical compliance-or-cutoff decisions.
- If tax collection spreads, Amazon's long-standing price edge over local brick-and-mortar retailers narrows, shifting competitive pressure toward fulfillment speed and selection instead of the embedded sales-tax discount.
Third-order effects
- A patchwork of state statutes colliding with Amazon's constitutional challenges points toward either federal legislation or a definitive court ruling on whether physical presence still governs online tax collection — until then, each state law doubles as a test case.
- Affiliate marketing as a channel becomes structurally fragile wherever nexus laws pass, since publishers' income depends on a retailer decision made two steps away from them.
The trend: E-commerce's de facto tax exemption is being dismantled state by state, with post-recession budget pressure turning each affiliate-nexus law into both revenue policy and a constitutional test case.