Indirect Revenue

I’ve been writing quite a bit recently on indirect taxation, and I thought that I would take a minute to look at things from the opposite side of the fence as it were. First, some context for my thoughts:

The state of Connecticut passed a new Internet tax law and contends that Amazon had a physical presence because it had affiliations with websites through its Amazon Associates program. Of course, Amazon dropped the Associates program in Connecticut to avoid having to collect the sales tax or fight that contention. In fact, the same scenario took place in California this year – so Amazon dropped its California Associates program to opt of that government scheme. The headhunting tax thieves from so many states are so focused on getting Amazon, this has come to be known as the “Amazon Tax.” Theft-seeking bureaucrats are fond of supporting their schemes as a logical move to combat an “unfair advantage” that they say online retailers have over brick-and-mortar retailers.

Many people generally only think about the direct taxes they pay when considering alternative tax policies (this being, of course, a form of the broken window fallacy). The same mindset is found in bureaucrats who, contrary to popular belief, are actually human.

Bureaucrats get excited about finding new ways to increase tax revenue, as was seen above with Amazon. They found a new way to charge taxes, or so they thought. There models assumed that Amazon would simply comply because they would not want to forego the extra profits found by selling through their associates in that state. Unfortunately, Amazon’s margins are pretty thin. So thin that, as Karl Denninger has observed, collecting sales tax will kill their competitive advantage. Thus, not having any business sense or, apparently, access to financial reports, Connecticut decided to charge Amazon sales tax because it had associates in the state. Amazon cut ties in order to avoid paying taxes.

As is readily obvious, Connecticut won’t be seeing the increase in tax revenue it’s expecting. But they should also see a drop in revenue from the income tax because associates are now not earning anything from being associates, and will therefore pay less. Some may even move out of state if being an associate was their main job in order to recoup their lost income. There should also be negative repercussions on sales tax revenue, since former associates will likely spend less money. Astute readers will note that this is basically the money multiplier effect being negatively applied to taxes.

What’s astonishing is a) how bureaucrats thought there was not a single chance that Amazon wouldn’t pay the new tax and b) how bureaucrats failed to account for the possibility of Amazon dropping the program. Quite simply, it is amazing how bureaucrats apparently did not even contemplate how their tax policy has indirect effects on other tax revenue. Their stupidity is simply astonishing.

2 comments to Indirect Revenue

  • Sarah Kaufman

    Your piece contains the common misinformation that Connecticut is requiring Amazon to pay tax. The requirement is that Amazon and other online retailers using affiliates in Connecticut “collect” the sales tax on sales made to Connecticut shoppers and then remit it to the state. Amazon is not being taxed.

  • I think the statement, “So thin that, as Karl Denninger has observed, collecting sales tax will kill their competitive advantage,” in the article makes it clear that Amazon is collecting the tax, not paying it themselves.

    Regardless, Amazon’s decision to end its affiliate program in CT to avoid the state’s claims that company has a nexus within the state was the right one for the company. How did the bureaucrats that made this decision not see that coming, given that Amazon has done the same thing in other states? Did the thought of some easy revenue that could prop up their bloated, debt-ridden government cloud their judgment?

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