Taxation by Press Release in the Cradle of Liberty

Taxation by Press Release in the Cradle of Liberty

December 14, 2010



Pennsylvania’s recent enactment of the so-called “Amazon Tax” via a press release from the Department of Revenue may be seen as a deft political move by Governor Tom Corbett to close a budget gap without enacting any new taxes, but viewed from afar the action is a cause for alarm over the state of politics in Pennsylvania today.

The Amazon Tax is an attempt to collect revenue from a legal black hole. Like most states, Pennsylvania has a sales tax under which retailers (both online and offline) are required to collect and remit the tax from all sales. The exception to this rule is for out-of-state retailers who have no physical presence in the state, which is a bright line that the Supreme Court crafted pursuant to the Constitution’s Due Process and Commerce clauses. Where the sales tax is not collected, however, consumers are still obligated to pay the tax to their state, which is almost universally ignored or at least forgotten. Pennsylvania estimates that it loses $380 million annually to this black hole.

This is where the Amazon Tax comes to the rescue by redefining who is an in-state retailer by including out-of-state online merchants (such as online behemoth which pay commissions to in-state affiliate marketers and thus extending the collection obligation to such merchants. The Amazon Tax has become a popular item of discussion in state capitols the past few years because in theory it generates revenue for cash strapped states without having to actually raise taxes or, stated more frankly, is a gimmick that allows politicians to avoid an honest debate and accountability when it comes to state finances.
Several states have enacted legislation to adopt the Amazon tax, but Pennsylvania is not one of them. While the website for the Pennsylvania capitol explains that “[m]aking law in Pennsylvania is a meticulous process — and for good reason,” Governor Corbett has enacted the Amazon tax by simply releasing a press release saying that existing law includes the Amazon tax. This, of course, begs the question why the Commonwealth left over a billion dollars in sales tax revenue on the table during e-commerce’s first generation or thought it necessary to attempt to pass Amazon tax legislation earlier this year. In addition, this expansive interpretation of the tax code flies in the face of Pennsylvania law that tax laws are to be strictly construed.

In reality, the Amazon tax is not quite the panacea advocates portray it to be. In fact, enactment of the tax causes immediate economic hardship as hundreds of online retailers immediately sever their relationship with in-state affiliate marketers who lose as much as 50% of their income as a result. For Pennsylvania’s 9,000 affiliate marketers this means an immediate loss of as much as $350 million in annual income (which is more than five times greater than the losses to state businesses due to record flooding caused by Tropical Storm Lee). That may be why “Amazon Tax states” Illinois, North Carolina and Rhode Island have seen little to no increase in revenue as a result.

While this is catastrophic for affiliate marketers, all Pennsylvanians should be alarmed that in this cradle of liberty, a mere forty miles from where Lincoln so eloquently honored those who fought to preserve government of and by the people, the tax laws can be dramatically altered by a mere press release.

Carl Sandburg noted that “[w]henever a people . . . forget its hard beginnings, it is beginning to decay.” That is why the bankruptcy that Pennsylvanians should be alarmed about emanates not from Harrisburg City Hall but from the Governor’s mansion

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