Utah’s online sales tax bill died because it had serious flaws

The Salt Lake Tribune carried an op-ed this week bemoaning Utah’s Legislature caving-in to Amazon by failing to enact an online sales tax this legislative session. While I certainly agree that the price differential is hurting Utah businesses, this bill was the wrong way to level the playing field.

by Beau Sorensen
by Beau Sorensen

The primary obstacle to this bill was in its implementation. The bill declared that if internet companies advertised on a website owned by a resident or corporation (commonly called an affiliate link) that is incorporated in the state of Utah, that is enough of a physical presence (in lawspeak, a nexus) for them to be subject to the tax laws of Utah. This interpretation flew in the face of prior jurisprudence, notably 1992’s landmark case Quill v. North Dakota, where the US Supreme Court declared that a corporation had to have offices, warehouses, or employees in a state in order to be subject to the tax laws of that state.

That isn’t to say that there’s no precedent for pushing the limits of Quill. There are currently multiple lawsuits in various stages of litigation as states look to use affiliate links to create a tax nexus. While there has been some success in collecting taxes from online sales, there has been a mixed track record (at best) in these laws helping increase state revenues. This is the result of retailers like Amazon and B&H Photography terminating affiliate contracts with companies in those states. It also has led to a decrease in income tax revenue, as those online companies move their legal domicile to another state in order to stay in business. Indeed, several notable Utah bloggers, including Jesse Stay and John Huntinghouse were on record saying that they would leave the state to keep their revenues intact.

The problem from a nexus perspective is the distance between affiliates and their advertisers. From a labor law perspective, these are 1099 relationships. This means that the affiliates are independent contractors who provide a good or service to advertisers. In exchange, they are given money. Amazon and other online retailers do not direct these companies in any way, nor do they provide the equipment for them to run. To say they have an arm’s length relationship understates things by an order of titanic magnitude.

A good analogy would be if Tesla (currently banned by state law from doing business here) put up billboards on the side of the road advertising that you can buy a Tesla in Denver or Las Vegas. If Tesla spent more than $50,000 with Reagan or YESCO, by this logic they would be subject to collecting and distributing taxes to Utah for any car buyers from the state, regardless of which state they purchased the car in. Billboard companies provide a service – advertising – and have no other relationship with Tesla. This doesn’t stand up to the nexus test, and neither should affiliate links on blogs and other websites owned by Utah-based companies.

All this being said, it is in Utah’s best interest to find a way to level the playing field. The simplest, from a national perspective, would be to eliminate the sales tax entirely and roll the revenue collection into the income tax. This would have the effect of raising our state income tax to approximately 8.5% from its current level of 5%. While it would take an amendment to the state constitution, it would level the playing field for retailers, it would be revenue neutral, it would eliminate the concerns of leakage to national or international internet firms, and it would be legal.

If the issue is that we want to enlarge our revenue share, this is a less effective way to do so. We may reach 100% compliance with sales taxes, which is a good thing. We will also ruin the business models of many Utahns, leading to a decrease in income taxes via them leaving the state or having less lucrative business models.

If this law is primarily aimed at Amazon, an even simpler way to solve the problem is to create the incentive for Amazon to build a physical presence in the state. This wouldn’t be unprecedented – Salt Lake City is the Crossroads of the West for good reason. They could locate a warehouse within easy access of SLC Airport that would be within 12 hours of almost any location in the West. With the right tax incentives, this could easily happen (Amazon is already looking at locating warehouses closer to customers), Utah would have their nexus, and all of those sales taxes would suddenly be collectible, without a bad law to implement them.

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