California recently passed AB153, commonly known as the 'Amazon Tax.' The bill stipulates that sales tax is to be collected on online purchases from businesses that have any operations based in the state. Several other states have similar laws, and even more are considering drafting legislation to raise tax revenue. Despite the media moniker, the tax has potential to affect more than just large corporations like Amazon.


The main area of contention in the bill concerns interstate commerce. The 1992 Supreme Court decision Quill Corp v. North Dakota ruled that even though a company sells its products to customers in another state, it is not entitled to require its customers to pay sales tax as long as the company does not have a significant nexus of operations in that state. While that case dealt with mail-order catalog operations, it has acted as the precedent for internet based companies as well. However, the ruling also included an ominous message of exception, stating“we have held that, if a foreign corporation purposefully avails itself of the benefits of an economic market in the forum State, it may subject itself to the State's in personam jurisdiction even if it has no physical presence in the State.”

What Does it Mean?

As per the ruling, which considers both the Commerce Clause and Due Process guarantees of the U.S. Constitution, a company is only subject to sales tax if it has operations in the state of purchase. With the internet transposing multiple borders, this ultimately begs the question of what constitutes a state presence? According to AB153, it includes:

  1. Any retailer maintaining, occupying, or using, permanently or temporarily, directly or indirectly, or through a subsidiary, or agent, by whatever name called, an office, place of distribution, sales or sample room or place, warehouse or storage place, or other place of business.
  2. Any retailer having any representative, agent, salesperson, canvasser, independent contractor, or solicitor operating in this state under the authority of the retailer or its subsidiary for the purpose of selling, delivering, installing, assembling, or the taking of orders for any tangible personal property.

Thus, online retailers that can be demonstrated to fall into any of the above categories are subject to collecting sales tax under the law. There are other further stipulations included, but these deal mostly with tax exemptions. The full text of the document can be found in the bill, linked above.

Areas of Contention

While there is a lot of support on both sides of the argument, the bill has received national press attention largely due to the negative response of Fortune 500 company Amazon Inc. and renowned businessmen like Steve Forbes. Amazon has appealed a similar law passed in New York in 2008, and is currently paying tax into an escrow account pending the appeal decision. In other states that have passed similar legislation, including Illinois, North Carolina, and Rhode Island, Amazon has cut ties with affiliate companies that have been defined under the tax law as evidence of a state presence. When the law entered the state House last year, Amazon sent a letter to its 25,000 California affiliates stating that it would cut contracts and stop paying commissions to them if and when the law passed. Amazon has also worked with a referendum to overturn the law.

These affiliate programs, part of the official Amazon Affiliate organization, are websites that make money by referring traffic and sales to the main Amazon site. Many of these affiliates are in the form of content blogs which provide information about a certain products – such as Consumer Electronics – and provide links the discussed product on Amazon. The other major affiliates types are companies such as, which aggregate deals and coupons. Often these sites link to many e-retail sites besides Amazon, including

Tax Revenue

The logic behind the bill is that it will raise $317 million annually in state and local revenues. However, when you consider Amazon cutting ties with its affiliates to avoid the taxes, this number shrinks to a projected $114 million (estimates by the California Board of Equalization). While even the smaller amount looks attractive to a hurting state budget, when you factor in the jobs moving out of state along with their relevant income taxes, the numbers start to look counterproductive.

Empowering Brick & Mortar Businesses

Aside from the possible tax benefits, the other major argument in favor of the bill is that it will help physical businesses compete with out of state online competitors. While the taxes don't directly come out of a company's profits, they provide a comparative advantage because untaxed goods are cheaper for the consumer (though shipping is a consideration). Thus, companies from independent bookstores to electronic retail chains like Best Buy and Target will be able to match Amazon and related companies prices better.