Wednesday, March 28, 2012

Affiliate Nexus Sales Tax: The Internet Sales Tax

House File 1849: Affiliate Nexus in Minnesota

                The new affiliate nexus in Minnesota was introduced to the House and Senate on January 24, 2012.  The bill would require affiliates of such vendors as Amazon and Overstock to pay sales tax for all transactions conducted in Minnesota.  This bill is a departure from the current sales tax which requires that the vendor have a physical presence in the state of Minnesota in order to be taxed.  If the bill becomes law, it would take effect for any sales and purchases made after June 30, 2012.  Currently bolstered by bi-partisan support from the House, Senate, and Governor, the affiliate nexus bill is likely to pass.  

Information about the Bill is found below:

Affiliate Nexus Tax in Other Jurisdictions

                The affiliate nexus tax has currently been passed in eight states: Arkansas, California, Connecticut, Illinois, New York, North Carolina, Rhode Island, and Vermont.  The State of New York was the first state to pass the legislation, enacting the tax in 2009.  Thus, the New York affiliate nexus served as a model for other states to pursue such legislation. 

                Regarding the effectiveness related to the affiliate nexus tax around the country, there is serious doubt and criticism about its ability to effectively raise significant revenue.  While the projected revenues for the tax appear high in some states ($317 million in California), the cancellations of affiliate agreements by Amazon and other vendors could reduce these figures, as well as decrease income tax generated by affiliates.  In other words, the tax may prove to be counterproductive in terms of generating additional revenue.

Issues surrounding the Tax

Some issues surrounding an affiliate nexus tax deal with the fairness of the tax, the amount of revenue the tax could raise, and whether the law would be constitutional.  The first issue of fairness comes from brick and mortar businesses being undersold by Internet retailers.  Secondly, the affiliate tax in Minnesota is not set up to raise a significant amount of revenue. Thirdly, there are concerns the affiliate nexus tax may not be constitutional because it may not be covered by the US commerce clause.  If it were deemed unconstitutional, no revenue could be raised.

Evaluating Affiliate Nexus

Based on the four measures used to assess a tax – efficiency, equity, sustainability, and feasibility - this tax is an okay revenue raiser, a three on a scale from one to five.  The first reason for this is that the tax is fairly inefficient because larger Internet retailers may use other methods, other than Minnesota companies, to drive traffic to their websites, meaning local businesses could lose a source of income.  Secondly, this tax does pretty well equity issue because of the tier of $10,000 included in the bill, but it is a sales tax and those are generally regressive in nature.  Third, on sustainability the tax is fairly small, this comes from the facts showing the tax base as being narrow and the law may also be deemed unconstitutional at some point – both limit the revenue raising capacity of the tax.  Lastly, the bill is in the middle on the feasibility scale because it seems politically feasible, but it may be administratively difficult for businesses.

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