Martin O’Malley (D, MD) pushing for Amazon tax.

(Full disclosure: I am an Amazon.com Affiliate for Maryland.)

It’s still in the early stages – the Governor has started the paperwork process and Comptroller for Maryland Peter Franchot supports the idea – but the definition of insanity is doing the same thing over and over again and expecting a different result, and goodness knows that the Democrats keep doing precisely that when it comes to Internet taxes.  Franchot (who, as the Red Maryland podcast above notes, is likely running for Governor in 2014) is claiming that the revenue that Maryland would glean would be roughly $160 million; given the way that Maryland’s Democratic-controlled government has wrecked the state’s economy recently, that number is a glittering prize.

A real pity that it’s a mirage. 

Very short version of the Amazon tax controversy: online retailers don’t have to collect sales tax for a state unless they have a physical presence in the state (thanks to a Supreme Court decision).  Various state governments (typically Democratic-controlled ones), usually at the instigation of big-box brick-and-mortar retailers who hate the idea that online retailers might do to them what the big-boxes did to small brick-and-mortar retailers*, have decided to get around this by defining an in-state affiliate of an online retailer as being that retailer’s physical presence in the state.  When this becomes a state law, Amazon.com responds by immediately terminating its affiliate program in that state, thus neatly eliminating its obligation to collect sales tax**.  The last iteration of this happened in California, where Amazon.com simply dropped roughly 25,000 affiliates without even breaking stride.

As for the supposed tax revenues being generated from this law… well, the Tax Foundation reports that neither Rhode Island nor North Carolina (two early adopters of the tax) have seen increased tax revenue from their respective measures, and that Illinois is already seeing affiliates affected by the Illinois version flee the state.  It’s not particularly surprising, as these laws are put into place under the (frankly, arrogant) assumption that Amazon.com will simply give up and start collecting sales tax.  This is because Democratic legislators typically overestimate the level of business that Amazon.com would have to give up in order to avoid collecting sales tax.  To go back to New York: since Amazon.com is currently collecting sales tax there, we can actually get an idea of how much of its business in-state is done via affiliate – and it turns out that the total percentage is a mere 1.5%.  If you don’t think that the company will not dump that revenue to avoid the hassle of collecting and transmitting sales tax on the remainder, then you have not been paying attention to its past history.

So much for the sales tax revenue – but there’s another issue: income taxes.  As in, the taxes that in-state affiliates (both personal, and corporations who file as a person**) normally pay on their income via referrals – which Amazon.com does faithfully report; you can’t be an affiliate for them without filling out a W-9 form.  That money goes away with the Amazon tax – in fact, the company keeps it – which means that any state that passes an Amazon tax can pretty much expect at least a slight drop in tax revenue from passage.

So, to sum up: Amazon taxes don’t work, they appear to degrade existing tax revenues, and they seem to be driven by the twin impulses of Democratic economic illiteracy and big-box retailer spite and malice.  Which probably means – since neither impulse seems likely to change – that I (and a lot of the political blogosphere) will be informed some time in the next year or so that the Democrats have decided to kill the golden goose… then throw the corpse into the sewer.  Admittedly, the screams of outrage from people to my left who rely more on that income will be mildly entertaining – but, honestly, I’d rather have the money (minus federal, state, and local taxes, of course)…

Moe Lane

*Believe me: if, say, Wal-Mart could duplicate Amazon.com‘s success, they would.  However, they apparently can’t; and their own affiliate program is… substandard.  Put it this way: they cap it where Amazon.com starts.

**The one exception to this is New York, where there is an ongoing court case challenging the law.  Even there, the money being ‘collected’ is being held in escrow until a final judgement; if the law is upheld, Amazon.com will almost certainly end its program there, too.