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Comment by jonkelly | Hacker News Reader

I'm still kind of mystified as to how these laws keep getting passed. I think there is clearly room for debate about whether or not Amazon customers should pay sales tax in their home jurisdictions. But, there is no reasonable debate about these laws. They have perfectly predictable results: law is passed, Amazon nukes affiliates, state loses income tax from affiliates, gains nothing as a result. I find it incredible that state lawmakers either think that it will be different in their state or that it's worth destroying the incomes of their taxpayers to just make a symbolic gesture. Does anyone have a reasonable justification for the lawmakers' actions or is it really just a mix of idiocy, vindictiveness, and appeasement of local donors?

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I'll play devil's advocate.

First, governments consistently think of the economy as a static model. So you add up how many online sales you have, add in a percentage tax, and expect to make that money.

Second, Amazon pulling out or not is simply a short-term obstacle. The long term strategy is to put a stake in the ground, then continue to lobby and work at the national level. This sets precedent, even if it doesn't work.

Third, there's a lot of ignorance. You don't have to pass an economics test to become a legislator. I think sometimes in any group that deals with another group there's an "us versus them" mentality that takes over. In some folks' mind, if you're making money, they should get a share of it to spread around. Trying to adapt and configure your business model to optimize -- or simply just to survive -- is a sign of selfish, unethical behavior. Both sides of tax debates engage in a lot of emotional over the top rhetoric. It's easy to lose track of priorities and principles.

The part I have a hard time comprehending in these situations is that many legislators have legal backgrounds being attorneys, yet seem to completely forget about the constitution.

Seems that the collateral damage to affiliates from this law is specifically because those legislators understand the commerce clause of the constitution.

The constitution explicitly prohibits states from interfering with interstate commerce, which is what Connecticut is doing (forcing regulation on a company outside their state), and is why Amazon is calling the law unconstitutional.

Except it doesn't occur outside their state if an amazon affiliate is in CT. Hence amazon withdrawing.

Exactly, they are bending they are pushing the rules just enough to get away with it and have something that's not unconstitutional (at least according to them) It's in a way ingenious what they are doing. Law making is a form of hacking in my view.

responding to each point. 1) expecting to "make that money" when no other state has is idiocy. 2) the "stake in the ground" is just symbolic. Do they really think that helps at all? 3) like I said, I can see both sides of tax debate, I just find it wildly irresponsible to nuke the revenue for a bunch of your constituents because you've lost track of priorities.

RE: 1), you'll notice a lot of big market states have all jumped at the same time. That makes the jump look a lot more appealing to me if I'm a state legislator. Eventually Amazon won't want to forfeit affiliate business in every big state economy except Texas and Delaware. Or that's the gamble, at least.

nostromo had the right response to that below. There are plenty of jurisdictions for the larger affiliates to jump over to. I'd be very surprised if Amazon doesn't have a 95/5 ratio like most affiliate programs in terms of revenue produced by largest affiliates. The bigger affiliates will have no problem incorporating in one of the no tax states.

Just to illustrate your point, in Colorado the legislature did this same thing (lobbying by small business was used as justification), but the large affiliates I'm familiar with (2, specifically) moved their offices to Laramie, Wyoming (2.5hrs from Denver). Keep in mind, there are ~5M people in our entire state.

Thanks, that's the argument exactly, specifically the second part.

Regarding the static model, it's not so much that it's a static model as that for the overwhelming majority of online purchases, it's displacing a local purchase. It's actually a more capitalist economy from a certain point of view to make online and local purchasing compete on the same ground, especially when the market distortion (which yes stems from sales taxes' existence in the first place, coupled with the commerce clause) discriminates against your voters.

It may be displacing a local purchase... in a third, unrelated state. Only the affiliate lives in Connecticut, the purchaser may live in Colorado... or Czech Republic, for that matter. I think you have the argument about capitalism backwards. Any time someone says "that's unfair, we should change the laws to help (inefficient business X) compete more effectively with (efficient business Y)", they are directly contradicting the idea of capitalism.

Where the social good lies is sometimes hard to work out; but I'd guess in this case Connecticut residents would be better off with an efficient Amazon and the ability to become Amazon Affiliates than with the small amount of tax revenue that this legislation tries to capture.

Online and local purchasing do compete on the same ground. A local store uses CT state services and pays taxes to support them. An online store does not use CT state services and does not pay taxes to support them.

Similarly, many companies use Microsoft software and pay license fees. My company does not.

Would it be "more capitalist" if we were forced to pay a Microsoft tax, to eliminate the "market distortion" of using lower cost software?

yummyfajitas, I think by "more capitalist" jbooth means "more competitive". You are obviously right that forcing companies to use higher-cost inputs is inefficient, but taxes are not an input -- they're a necessary burden meant to be shared.

To take an extreme example, using a tax shelter could lower the cost of a company's services while decreasing the efficiency of the economy.

Of course taxes pay for inputs - the inputs are public goods. Taxes are compulsory only to prevent freeloading - you might enjoy the benefits of the CT state police without paying for them.

Amazon doesn't enjoy the benefit of the CT state police. Hence, it is not efficient to force them to pay for it.

A tax shelter is only inefficient if it allows a company to consume services while forcing others to pay for them. If a company does not consume those services, it is inefficient to force the company to pay for them.

yummyfajitas, can you give a real-world example of a tax haven which is Pareto equivalent or superior to the company paying its taxes?

Also, who says Amazon pays the tax? Insert elasticity argument.

In the real world nothing is Pareto equivalent or superior to anything else, except maybe for gifts given to hermits. Pareto efficiency is a purely theoretical construct.

You're dodging the essence of the question. Give us one real world example of a case where tax evasion has been A Good Thing.

yummyfajitas, it frankly sounds like you're econtrolling. I looked at your profile and you seem like a smart, educated person, so I'll respond in good faith so you can see how weak your arguments sound.

> Taxes are compulsory only to prevent freeloading

Says who? This sounds like a stylised model from Econ 101.

> A tax shelter is only inefficient if it allows a company to consume services while forcing others to pay for them.

Prove it.

> Amazon doesn't enjoy the benefit of the CT state police.

I don't use the Merritt Parkway but that doesn't mean I don't owe tax on it.

> Pareto efficiency is a purely theoretical construct.

This from someone who just boiled the entire political economy of Connecticut down to a prisoner's dilemma?

> If a company does not consume those services, it is inefficient to force the company to pay for them.

What is your reasoning?

Perhaps you are sharing these thoughts before giving them a sound-check? I don't mean to be rude but what you're saying doesn't make sense coming from someone of your educational background.

Literally every case of tax evasion under a government where the tax rate is too high and the marginal utility of higher taxes is negative.

Can you give a real example of a case where this has actually happened? (by marginal utility I assume you mean marginal revenue; governments do not have utility)

No I mean marginal utility. Governments have utility. For example, they do things like give people money to maintain roads. The marginal utility of higher taxes would be the value of the extra amount of road maintainance, and all other changes to the physical universe, that happens as a result. (Edit: So compare the universes where the government rakes in $x and $x+epsilon of revenue. Which is a better universe? There are plenty of governments where $x+epsilon would produce a worse universe. It might depend on who it gets the extra epsilon from.)

Utility is only defined for individuals. It sounds like you're trying to talk about how some sum of citizens' utility functions changes as a result of a change in government spending.

Response to your edit: you haven't defined "better". And I'm still waiting for a real world case where $x+$epsilon has been dominated by $x.

Yes, that's what I'm talking about.

So wait, you're looking for a case where $x+$epsilon government revenue has greater utility than $x?

Because that's the opposite of what you were asking for before...

First you have to define what "better" means since there are O(300 million) utility functions in the U.S.A.

Second, I want a real-world example of a "negative marginal utility" of taxation -- which tax rate was raised, who it affected, how they evaded it, and why it was good for the society at large.

Homeless people paying sales taxes.

Do have any other questions?

This response does not answer either question.

I'm sure if you're dissatisfied to my answers then you'd have no problem coming up with some of your own examples.

Edit: Wait, you want me to define a utility function for people? That was your first question? That's just a stupid question. Define your own utility function. I don't care what it is. And your second question is stupid too. Sorry, I'm not a keeper-tracker of tax evasion. So let's say "any time a poor person evades taxes." Or many of those cases. If you want a specific example, too bad. If the lack of a specific counterexample of the kind you specified is actually the barrier preventing you from changing your opinion about this, then you shouldn't bother trying to have opinions about things. The fact that some people get more value in government services than they pay in taxes is proof that there are people whose tax evasion would benefit society at large. This is a simple mathematical truism.

> I'm sure if you're dissatisfied to my answers then you'd have no problem coming up with some of your own examples.

I was challenging you on this point because I don't believe you can come up with an actual example of a company's tax evasion benefiting society.

> Wait, you want me to define a utility function for people?

No, I wanted to prompt you to think about defining a single utility function for 300 million people. There is no way to do it, because you cannot compare interpersonal utilities. Your statements about governments having utility suggests that your thinking on this topic is muddled.

> If you want a specific example, too bad.

No empirical evidence, then?

> The fact that some people get more value in government services than they pay in taxes is proof that there are people whose tax evasion would benefit society at large.

It would not benefit society at large; the benefits would be private to the evader and everyone else's tax bill would go up.

> This is a simple mathematical truism.

Not only is it false, but I don't think you know what a truism is. A truism is a tautology.

> stupid ... stupid ... you shouldn't bother trying to have opinions about things

SamReidHughes, there is a saying that to know a little economics is worse than to know none at all. I think you are overconfident in your theories and should be more humble and polite in dialogue with others.

First of all, you are conflating tax avoidance (taking actions to avoid tax liability) with tax evasion (lying to the tax authorities about your liabilities).

In the real world, one efficient "tax shelter" is Amazon locating itself outside of CT. If Amazon were to pay taxes to CT, then CT would produce the public services necessary to support Amazon. Since Amazon is not located in CT, this would be wasteful. Thus, Amazon locating themselves outside of CT and avoiding CT taxes is A Good Thing.

[edit: you appear to have edited your post extensively after I responded to it. It's generally polite to indicate when you do this.]

> you are conflating tax avoidance with tax evasion

Fair enough. I meant to use tax evasion as an extreme example to prove the inner case, but I can see how it would look like conflation.

> one efficient "tax shelter" is Amazon locating itself outside of CT

Petitio principii.

> Since Amazon is not located in CT, this would be wasteful.

Does not follow. Where is the dead weight loss?

Hmmm. "More capitalist" would be to eliminate local sales tax to allow businesses to compete.

Actually, it only goes as far as if you're making money, they should get a share of it. Pork barrels aren't just Federal.

Indeed.

I find it very difficult to underscore this point without going on a rant -- perhaps because I find it so bad.

Let's say I'm living in IL and making 10K a month with Amazon sales. This is all because of a lot of hard work putting bits on a server somewhere in Austin or something. People come from all over the world to consume content and buy things.

Aside from the legal discussion, in practical terms what part of this equation involves the state of Illinois? I don't mean to be facile, but looks to me like the only reason they're coming for the money is because they can. In any other scenario we'd call this a shakedown. But because politicians do it we call it policy. Weird.

I'm not by any means arguing for no government, just pointing out that most times when I pay a tax there's something concrete and direct in return. If I pay property taxes, it goes to the local school. If I pay a road toll, it goes for road maintenance. If I buy a fishing license, I pay for game inspectors. This payment and feedback loop allows me to be able to judge if a tax is working or not -- and form some kind of opinion about what rates might be best. Here I'm just paying the state because they have the power to hurt me if I don't pay them. Seems to me once you reach a certain point in decoupling taxes from benefits, there's no rational basis to have any kind of compromise any more. Instead you get these hugely polarized debates. This is not a good system for people to live in.

What part of it involved IL? Are you being deliberately obtuse? You living in IL. States charge taxes to provide services to the people who live and enter the state. You live in the state, therefore it is entirely appropriate for IL to charge you income tax. If you don't like it, vote in different representatives because the other thing that you get to do in IL is vote for IL state representatives.

The whole point is that rather than the state happily collecting their income tax on any income generated by state residents, which they have always been able to do, they are attempting to levy a tax against all Amazon commerce transactions based on the fact that they have affiliates operating in the state.

DanielBMarkham is not making a case that IL isn't entitled to tax his income from the Amazon affiliate program. It is taken for granted that they will tax the additional income, as they have been doing since before this new budget/law. What they are attempting to do is tax more than just income generated by affiliates living in the state, which is where the argument that they are not contributing to the flow of business which would warrant that.

Vampirical, I'm not sure I understand you. Illinois spends state funds to make Chicago, Peoria, Carbondale,... attractive to live in. People with money thus move to / stay in IL and spend some of their money online. Isn't that a contribution on Illinois' part?

If I understand his metaphor and current law correctly: this law changes nothing about income tax. Regardless of this law, Mr. Amazon-Affiliate pays income tax to the State of Illinois on his Amazon affiliate income. I believe the poignant line from the blog post is:

  ... imposes the collection of taxes from consumers on sales
  by online retailers – including but not limited to those
  referred by Connecticut-based affiliates like you – even if
  those retailers have no physical presence in the state.

I interpret this as saying "if a Connecticut resident refers customer X to company Y, and X buys a product from Y, then company Y must pay tax on that sale." The only necessary tie to Connecticut is the referrer.

Of course, they'd also tax Mr. Amazon-Affiliate's affiliate income as well. That smells like double taxation.

Also, I think your comment suggesting that "If you don't like it, vote in different representatives," is rude. Obviously, Mr. Markham is aware of his Democratic rights and duties. He very well might vote against this sort of legislation, and he doesn't deserve to hear derisive comments when voicing his disapproval.

edit: formatted the quote for easier reading

I actually don't understand that part of it. How do sales tax on CT consumers -- who may or may not be driven to Amazon by a CT affiliate -- compel Amazon to terminate the affiliate programme?

CT-based affiliates may be driving traffic from outside CT, and CT-based purchases -- the thing being taxed -- might have been driven by an affiliate in Iceland.

Terminating _sales_ to Connecticut would amount to a refusal to pay the tax. Instead Amazon has chosen to raze the profits of a minority of CT constituents. They must be hoping that the ousted affiliates will march on New Haven.

(If I were a successful affiliate, though, I'd just make an out-of-state LLC and pass income through.)

I believe the problem comes from having a physical presence in the state. Most states have sales tax rules that say if you have a physical presence, you must charge sales tax. The rules were changed such that Connecticut is treating affiliates as a physical presence. If Amazon keeps the affiliates, they have to charge sales tax on everybody who purchases in Connecticut, which they really don't want to do.

While I'm sure part of the reason they don't want to charge tax is that no tax makes Amazon cheaper, I bet a bigger portion is the headache of trying to manage every single municipalities convoluted sales tax rules. I know in my city (in Utah), there are dozens of rules for types of goods that determine different rates. Imagine doing that on a nationwide scale.

I think the problem is that they want to apply a sales tax to anyone that is referred to Amazon /worldwide/ by a Connecticut referrer. That is why Amazon argues that it is unconstitutional. If it were simply taxing Connecticut consumers it would be similarly complicated, but I think there is more constitutional grounds for this. I'd have to check.

It's not like Amazon is going to pull out of the state.

>Let's say I'm living in IL

>Aside from the legal discussion, in practical terms what part of this equation involves the state of Illinois?

In practical terms, the argument goes that you benefit from the safety and health services that are (at least in part) provided by the state during the hours you work, marketing for Amazon. By extension, Amazon is also benefiting from these services provided (at least in part) by the state, which can be proven by identifying a single payment made from Amazon to an affiliate that is a resident of IL.

Legally, this could be grounds for one to argue that, by providing marketing services for Amazon while working in IL, nexus[1] has been created.

[1] http://www.bna.com/state-tax-nexus-p9122/

Care to comment on why this was down-voted? Did I misunderstand Daniel's question or not appropriately address it?

I would assume that some have taken this as advocating on behalf of states that impose sales tax on companies due to the residency of their affiliates. I carefully worded my comment so that this was not the case. On the other hand, if you feel I'm wrong about the position that these states have taken, please correct me...

UPDATED: My position on tax policy is not germane to Daniel's question and based on the rest of this post, would just be redundant to include. When a thread strongly reflects one side of an issue, it's much less dull to try and articulate the counter-point of view... wish more people would try this.

You don't have to pass an economics test to become a legislator.

Would that it were so.

The justification for these actions is simple: every state has spent the last many years spending themselves into a great deal of debt, now they are desperately grasping for revenue and amazon has big pockets.

But... it hasn't worked at all, producing not even one penny for any of the states that have tried it. Isn't that the proverbial definition of insanity?

Most states were actually doing great as of 2000, and have been cutting relative to their cost inflation for the last decade or so.

10-15% healthcare cost inflation has been spending states into debt.

Connecticut has increased its state spending by about 50-60% over the 2000-2010 period while its economy grew by only 15% in that time.

And what % of that is healthcare costs? Check it out. I don't know conneticut that well but if you employ a lot of people, and they have healthcare, then it was a huge cost to roll them over these past 11 years.

Think of it as a signaling game: what happens when all the US states have similar laws. Will Amazon just give up on affiliates?

With the widespread adoption of the Google Content network for advertising I am wondering if affiliate links are needed because they can just show up in the Google ad and the advertiser gets paid for clicks. The previous affiliate can still make a page about a product but let Google figure out the links to show.

Remember, there are five states that do not charge sales tax, so they have no incentive to fight Amazon. There are another five states where Amazon already collects sales tax. So, that's 10 states that have no reason to pass similar laws.

And of course, affiliates that make a sizable amount of money will probably not move, but will instead simply incorporate in one of those states (one of which happens to be Delaware).

Exactly. There are plenty of choices of jurisdiction for the bigger affiliates that matter to Amazon. This is really just a "nuke the mom and pop blogger" effect.

Can you really just change the place of incorporation? I thought to avoid a determination (under these laws) that Amazon itself has a physical presence in a state via its affiliates, Amazon was refusing to accept affiliates who had any physical presence in the states in question. As I read it, if your corporation is incorporated in Delaware but has its offices in Connecticut, you're no longer eligible for the affiliate program.

Enforcement might be another matter; seems like there's a good chance that you won't get flagged if you give Amazon a Delaware mailing address, even if you're (as a company or individual) resident elsewhere. But you don't even need to incorporate to do that.

Think of what happens when all US states legalize medicinal marijuana?

It is still illegal at the federal level.

How much money can a state afford to spend on federal litigation against a team of Amazon's lawyers?

It specifically imposes the collection of taxes from consumers on sales by online retailers [..] even if those retailers have no physical presence in the state.

The wording of this implies that Amazon now has to charge sales tax to customers in CT. If so, isn't that a massive gain for the state? Or will Amazon just ignore the law?

My guess would be that the "income" from affiliates is immaterial, but the states have a different problem: They do apply the tax to other companies with a "presence" in the state, and if they didn't attempt to collect from Amazon, they would face a challenge from companies that maintain a less tenuous presence in the state such as physical stores.

INAL, but if CT didn't try to collect the tax from Amazon, I would expect Barnes and Noble to argue that bn.com sales should be tax exempt even though they have a brick and mortar store in Glastonbury, CT.

Except the whole argument comes down to physical presence.

Now, if Barnes and Noble had a caravan of mobile RV bookstores registered in a different state that came into CT to sell books, B&N would have a better argument.

We hear you have money, we'd like it.

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