The Maryland Senate jumped on the Amazon tax bandwagon despite disappointing revenues and damaging results for a prior enactor. The bill targets Amazon and select others who states portray as state tax scofflaws.

Because companies such as Amazon lack direct physical presence in Maryland, the U.S. Supreme Court’s 1992 Quill ruling does not permit Maryland to require these Internet-based companies to collect Maryland sales tax. Despite having no physical presence, states can confer physical presence if a state can establish a formal relationship between the company and an in-state agent, representative, or salesperson. Maryland seeks to require Amazon and similar companies to collect Maryland sales tax based upon its relationship to its Maryland “affiliates”.

Two differing views have emerged regarding Amazon’s relationship to its local affiliates. States portray local affiliates as a local arm of Amazon, soliciting business on Amazon’s behalf and directing business otherwise conductible in Maryland outside the state and, hence, avoiding sales tax. In contrast, Amazon and its affiliates, insist the affiliate merely accepts payment for advertising. Reading Maryland Senate Bill 1071, it would appear the bill does indeed target any company seeking to advertise via a Maryland resident’s website.

As most, if not all, Internet ads can be clicked by the viewer to communicate with the advertised company, and as most ads are placed under some contractual arrangement, the bill certainly could trap many advertisers outside Maryland’s portrayed target class. With vague language applying to any company that receives “direct or indirect” so called “referrals” from a Maryland resident, “whether by a link on an Internet website or otherwise”, the concern is warranted. If quarterly sales resulting from Maryland referrals collectively exceed $10,000, then Maryland would consider the company to have Maryland “nexus” through its physical presence and would, thus, require the company to collect Maryland sales tax.

Following New York’s passage of a similar bill, quickly withdrew its agreements with its 3,400 New York-based affiliates but continued sales to New York residents through replacement out-of-state affiliates without ever collecting the New York sales tax. If passed, Amazon can simply fire its Maryland affiliates to avoid the tax. The bill faces tough opposition and currently remains in committee with Maryland’s General Assembly regular session ending on Monday, April 13th.

Updated 4/14/2009:  The Maryland Senate did not approve the Amazon sales tax bill during this year’s regular session.