California Governor Brown Signs Internet Sales Tax Settlement

California Governor Brown Signs Internet Sales Tax Settlement

By Mark Muntean

On Friday, September 23, 2011, California Governor Jerry Brown signed into law a negotiated settlement Amazon.com Inc., which postpones a new California law requiring Amazon to collect sales tax on online Internet transactions in California.  Amazon, for its part, agreed to drop its initiative effort to repeal the online tax.    The settlement is expected to cost California $200 million. 

Amazon also agreed to begin collection of California sales taxes in September 2012, unless Congress acts to establish a national standard in connection with the applicability of sales taxes to Internet sales.   Amazon’s focus is not on Congress since legal experts believe California’s Internet sales tax law violated the U.S. Constitution.  

In Quill Corp. v. North Dakota, 504 U.S. 298 (1992), a 1992 U.S. Supreme Court decision, the Supreme Court held that sales were not subject to incidence of sales tax unless the seller had “nexus” with the tax state.  Previously, Amazon fired its affiliates in California to avoid any nexus with California.  The Commerce Clause of the U.S. Constitution gives the federal government power to regulate interstate commerce and prohibits certain state actions, such as applying sales and use taxes that interfere with trade among the states.  In National Bellas Hess, Inc. v. Department of Revenue of Illinois, 386 US 753 (1967), it was held that a business whose only contacts with the taxing state are by mail or by common carrier lacks the "substantial nexus" required under the Dormant Commerce Clause.  The Commerce Clause is a frequent source of frustration for California as it reaches out to tax someone.

Thus, while the state cannot tax sales by businesses with no nexus with the state, Congress does have the power to regulate interstate sales.  However, it is difficult to see how the parties expect Congress to enact a federal standard for Internet sales taxes in a presidential election year.

Amazon also promised to hire 10,000 workers in California and spend $500 million on California distribution centers.  Several trade associations and retailers supported the bill since the new tax law results in a significant loss in sales to over 10,000 merchants, many of which were small businesses.