The Amazon Tax
IN 1992, the U.S. Supreme Court in Quill Corp. v. North Dakota exempted out-of-state retailers from collecting sales tax in out-of-state transactions, i.e. where they sold goods to residents of a state where the retailer had no physical presence such as a store, office, or warehouse.
In April 2008, New York sought to overcome the Quill decision when it approved a new tax as part of its 2008-09 state budget which contained a “Commission-Agreement” provision requiring out-of-state online retailers to collect New York state sales tax if the retailer uses independent contractors or other New York residents to solicit sales in excess of USD 10,000 from New York residents.
The law had an immediate impact on large online retailers like Seattle-based Amazon.com, which previously did not have to collect sales tax in New York because they did not have a physical presence in the state. Amazon and many other retailers have affiliate linking programs that enable other websites to maintain a link to the online retailer's site for incentives. Under Amazon's affiliate program, which Amazon considers a marketing arrangement, when a customer links to Amazon.com from the affiliate website, that affiliate receives a commission on the customer's purchases. Amazon has “thousands” of these affiliates in New York.
New York tax officials contended that Amazon.com's affiliate program makes it subject to the commission-agreement provision of the new tax law, forcing Amazon to collect sales tax on transactions with New York residents.
Now this tax is referred to as “Amazon tax.” The Supreme Court of the State of New York dismissed Amazon's suit.
Now other States are following suit. (no pun intended)
The US tax Foundation states,
The "Amazon tax" is just the latest in a series of efforts to eliminate the long-standing "physical presence" standard and replace it with a nebulous, arbitrary standard of "economic presence." Businesses throughout our nation's history could always ply their trade across state lines. Today, with new technologies, even the smallest businesses can more easily reach across geographical borders to sell their products and services in all fifty states. If such sales can now expose these businesses to tax compliance and liability risks in states where they merely have customers, they will be less likely to expand their reach into those states.
Similar situations are bound to arise in India in our proposed GST as well as our existing VAT.