Tax Competition, the Constitution, California, and Amazon.com

Earlier today, Jason blogged a bit about Amazon.com’s recent bristle with California over a sales tax levied by the state on orders filled by sellers in the Amazon Associates programs who just happen to reside in California:

Like many other businesses and websites, we got the e-mail yesterday explaining that Amazon.com is ending its Associates Program with California-based merchants due to the new tax on internet purchases passed by the state legislature and supported Gov. Jerry Brown as part of a budget agreement…. Amazon has done this in other states as well, California is just the latest. I tend to agree with Amazon that the tax is counterproductive and protectionist, but I’m not sure about unconstitutional. I’ll need to look into that more.

Ezra Klein weighed in on the matter today as well:

Amazon opposes this bill because it wipes out a price advantage they currently have against their competitors. And, as the Center on Budget and Policy Priorities has explained at length, their other arguments simply don’t add up. Now, Amazon is a business, and so you can’t fault it for playing hardball in an effort to retain a competitive advantage. But this is bad policy that they’re trying to protect — it’s starving states, killing brick-and-mortar stores and encouraging a race to the bottom among states who want to attract the offices of online retailers.

The economics of this are pretty simple, and Ezra Klein is right about how we can’t fault Amazon.com for wisely protecting itself and the participants in its popular associates program. But his tendentious “race to the bottom” language suggests that Amazon.com is somehow evil. Look, the phenomenon of tax competition, which occurs between states and countries all the time, is amoral. I also think the extent to which e-commerce “kills” brick-and-mortar establishments is an empirical question — a serious one, at that — and not something you casually throw into a blog post without evidence….not if you’re a journalist. Klein also suffers a bit from progressivism’s belief in magic, wrongly thinking that more tax revenues will lead to smaller deficits.

I’m not a legal expert myself, but I actually inadvertently made the case against the constitutionality of such a tax when Amazon.com was thinking about stopping a distributorship facility expansion into my home state of Tennessee because the legislature was under pressure from brick and mortar establishment:

This situation should be a no-brainer, but we’re actually having to stop to consider these two alternatives: Do we add much-needed jobs (and therefore incomes that fund a new wave of sales tax revenues) and commercial property tax revenues that didn’t exist before? Or try to wield tax power and send Amazon back out of Tennessee’s border and markets? If you answer with a good argument for the latter, please include a reference to what in Tennessee’s Constitution (or the U.S. Constitution) confers the power to tax purchases made by people living outside Tennessee that simply happen to be filled by a national corporation’s facilities inside Tennessee–I’m not a lawyer or a legal expert, so I’m willing to listen and learn.

Here’s my case, fleshed out a little further: the Internet has connected people in ways they’ve never before been able to connect, and one of the ways it has done this is through electronic commerce. As such, if someone in Michigan buys something from an Amazon Associate seller in California, and that order is filled in California (or anywhere else), then commerce has taken place across state lines. Last time I checked, only the U.S. Congress has the power to regulate interstate commerce, and California therefore has no taxing power over Amazon Associates sellers in California — unless they’re taxing purchases made by Californians only.

Here’s some food for thought — a paper by University of Georgia law professer Walter Hellerstein:

This paper considers the restraints that the Commerce Clause of the U. S. Constitution imposes on the states’ provision of tax incentives to encourage industrial location within their borders. The Commerce Clause by its terms is no more than an affirmative grant of power to Congress “to regulate Commerce with foreign nations, and among the several States, and with the Indian Tribes.” From the very beginning of our constitutional history, however, the U.S. Supreme Court expounded the view that eventually became central to our whole constitutional scheme: The doctrine that the Commerce Clause, by its own force and without implementing congressional legislation, places limits on state authority and that these limits may be enforced by the courts.

Under this so-called “dormant” or “negative” Commerce Clause jurisprudence, the US Supreme Court has articulated a number of constraints confining the states’ power to tax activities affecting interstate commerce. Perhaps the most fundamental of these is the rule that prohibits state taxes that discriminate against interstate commerce. The concept of discrimination is not self-defining, and the Court has never precisely delineated the scope of the doctrine forbidding discriminatory state taxes. Nevertheless, the central meaning of discrimination as a criterion for adjudicating the constitutionality of taxes affecting interstate commerce emerges unmistakably from the Court’s numerous decisions addressing the issue: A tax that by its terms or operation imposes greater burdens on out-of-state goods, activities or enterprises than on competing in-state goods, activities or enterprises will be struck down under the Commerce Clause.

I think that’s a pretty good theory on which to judge what’s happening here — economic and faux moral outrage aside.


The views and opinions expressed by individual authors are not necessarily those of other authors, advertisers, developers or editors at United Liberty.