On March 28th, I published an article on the difficulties of the enforcement of the right to be forgotten. The first point I made concerned personal jurisdiction. Amazon.com's struggle to avoid collecting (state) sales tax stands as a great example of the issues of personal jurisdiction regarding internet sites.
Happily, Verne Kopytoff, writing for the New York Times, points out a Supreme Court case on point, Quill Corp. v. N. Dakota By & Through Heitkamp, 504 U.S. 298 (1992). Kopytoff doesn't get the personal jurisdiction framework quite right, a state has personal jurisdiction over a those corporations which have "certain minimum contacts" such that the suit "does not offend 'traditional notions of fair play and substantial justice.'" (International Shoe Co. v. Washington, 326 U.S. 310 (1945)). In essence, any corporation which engages in "systematic and continuous" activities within a state can be subject to that state's jurisdiction. (See cases following Int'l Shoe, particularly, Zippo Mfg. Co. v. Zippo Dot Com, Inc., 952 F. Supp. 1119 (W.D. Pa. 1997), for more information). What this means for internet retailers is not clear. The law of personal jurisdiction for internet retailers is very confusing. The law in one area of the country can be very different from another area. This presents one difficulty with enforcing anything regarding the internet or internet transactions.
Nevertheless, states seem to have accepted that, at present, they cannot tax Amazon itself (except for where Amazon has offices). States can tax their own citizens, however. So, a handful of states have enacted laws to tax 'Amazon Affiliates.' For the most part, Amazon has severed ties with Affiliates in those states to avoid collecting taxes.
In short, Amazon has been doing what I suggested websites would do. It is removing itself from the jurisdiction of those states. As a result, those states cannot enforce their laws.
In the case of Amazon, and other online retailers, removal hurts the states. As George Runner points out in the Times article, affiliates are, for example, Californians who sell products online. Not all buyers are Californians. In fact, buyers could be from anywhere. If we use a Fermi problem to estimate the amount of money coming into California from other states as a result of those sales we find that roughly $302.4 million flowed into California in 2010 as a result of Amazon Affiliates. (We assume (1) $15 billion in sales were made the the U.S. (based on a total of $18.707 billion in North America), (2) sales are proportionate to population (CA holds ~12% of the nations population), (2) 20% of sales are generated by Affiliates (no basis), (4) Affiliates get to keep 84% of sales generated (average for Affiliate program item + referral fee)). Assuming online retail accounts for 3.4% of sales that means California saw a total influx of $291.8 million in 2010 due to Amazon sales.
If we then use a Fermi problem to estimate the revenue generated by Amazon Affiliates for the State of California we discover that California collects ~$14 million. (We assume (1) Affiliates don't report sales as income, (2) Californians spend their money the same way as everyone else (and this chart is accurate), (3) The aggregate sales tax is 10% (Based on CA Board of Equalization numbers). Note that I didn't break down the amount past initial sales, i.e. what the sellers of products to Affiliates buy and how much of that goes to the State). $14 million is a lot of money for one company to be generating for one state. Unfortunately for California, if Amazon severs ties with its Affiliates none of that money will be flowing into the state.
The Times article also talks about an interesting strategy Amazon has adopted regarding its "presence" in a state. Amazon avoids having to collect taxes in states where it might be deemed to have a "presence" by assigning ownership of its warehouses to a subsidiary. In Texas that strategy is running into a bit of a problem. Comptroller Susan Combs has sent Amazon a $269 million tax bill. While Governor Rick Perry (R) is still trying to moderate the dispute Amazon has decided to close its Texas warehouse, effectively leaving the state.
According to the Times, lawmakers in several states are "trying to broaden the definition of physical presence in the state to include partner sites of all retailers, not just Amazon." No word yet on if lawmakers are also trying to broaden the definition of physical presence in the state to include more activities in order to try to force online retailers to collect sales tax.
If lawmakers do try to broaden the definition of physical presence it will be interesting to see what kind of Constitutional question arises and what impact that would have on other areas of 'internet law.'
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