CO Amazon Tax Ruled Unconstitutional

Online retailers have been fighting what's been dubbed as "the Amazon Tax." Now, a federal court has ruled that a Colorado variation of the Amazon Tax is unconstitutional.

The 2010 Colorado law obligated retailers with $100,000 or more in yearly sales in Colorado to issue a report to the Colorado consumers, notifying them that they had to pay sales tax on online purchases.

Under that same law, the retailers would have to provide the state with the names of these consumers, as well as their addresses and amounts spent.

The U.S. District Court held that the law placed an unfair burden on out-of-state retailers and that the burdens unfairly discriminated against these retailers. Due to the fact that the law affected interstate commerce, it was deemed unconstitutional under the Commerce Clause.

The case on the taxation of online retailers such as Amazon, Zappos and Overstock places some core concepts of tax law against the Commerce Clause. The idea of nexus -- that a retailer must have a minimum connection to a state in order for a state to tax the retailer -- veers head-on into the limitations of the Commerce Clause. The clause prohibits states from enacting legislation that could affect interstate commerce.

The concept of nexus in state taxation has been addressed by some states. "Nexus" isn't always defined the same way across the states. In California, the state passed legislation mandating that nexus meant a physical presence in the state, such as warehouses, salespeople or offices.

Unfortunately, even this definition of nexus causes problems in the world of eCommerce. The definition places a burden on affiliate marketing programs, which are like loose partnerships.

With commerce becoming increasingly interstate and international, do the laws affecting online merchandising and retailing need a second look?

Related Resources:

• Cyberspace Law (FindLaw)
• Internet and E-Commerce (FindLaw)
• The 'Amazon Tax' and Affiliate Marketing (FindLaw's Free Enterprise)