States legislators across the U.S. are scrambling to find new sources of tax revenue to bridge their rising budget deficits. With over $160 billion in revenue on the internet, taxing electronic commerce is an obvious target. So it is not a surprise that states such as New York, California, Colorado and Minnesota have joined together to force online sellers to collect taxes. With two new bills (H.1731 and H.1554) working their way through our state legislature, Massachusetts has joined the movement.

Taxing E-Commerce

The basic issue is simple: when a consumer purchases goods on the internet, out of state providers such as Amazon are not required to collect taxes on their behalf. The lack of tax enforcement is the result of an internet-friendly U.S. Congress and Supreme Court from the 1990s. The result is that the burden to report and pay local taxes for out of state online purchases resides with the consumer, not the provider of the goods.

Unfortunately, many states have found their residents to be less than consistent payers of their taxes for online purchases. But with the rising deficits, some states think they have found a solution: proof that online providers such as Amazon are not actually operating out of state.

The evidence for in-state operations varies from state to state, but basically consists of one or more of the following:

  • Affiliates programs - States are claiming online affiliate programs represents a “nexus” in their states, making the provider obligated to collect taxes. e.g. if I as a resident of this state, provide a link to Amazon from my web site, I am operating as a representative of that company, and therefore subjecting Amazon to collect taxes on behalf of Massachusetts.
  • In-state warehouses - States with distribution centers owned by an online provider are using their existence as proof the provider is operating within their states, and therefore subject to collect taxes on their behalf.
  • Vendor travel - States are claiming travel to the state by employees of an electronic commerce provider provides evidence that the vendor is operating within their state. In response, some electronic retailers have adopted a policy banning travel by its employees to states seeking compensation for lost tax revenue.

Amazon & Cloud Computing

Normally the machinations of our state legislature would go unnoticed by me. But I think bills H.1731 and H.1554 could result in an adverse impact on the future of Massachusetts high tech. At the core of my concern is the disruptive change of our decade: cloud computing.

Like the internet in the mid-1990s and the PC revolution of the mid-1980s, cloud computing has the potential to reshape our industry. You only need to read the steady drum beat of press releases from companies such as Dell, HP, IBM, and EMC, to sense the widespread impact of the cloud. But behind the cacophony of noise being generated around cloud computing, is a quiet and somewhat unlikely company: Amazon.

For most of the rest of world, Amazon is a provider of online goods. But for a rapidly growing segment of high tech, Amazon is providing the compute, storage and application services driving their businesses. Local high tech startups such as Nasuni, Backupify, CloudSwitch, Yottaa, OfficeDrop and Sonian, are all powered by the Amazon Web Services cloud.

The Next Tech Boom

Reasonable people could disagree on whether or not it is time to take a second look at the tax moratorium on online commerce. But using loopholes to force online providers to collect taxes on behalf of states is an end-run around the U.S. Congress. With H.1731 and H.1554, Massachusetts has now joined the ranks of states that have declared themselves unfriendly to Amazon. The result of these moves will almost certainly limit Amazon's engagement within our state, impacting industry events, technical sharing and business relationships. The timing could not be worse, coming at a formative stage of the cloud computing, at a time when Massachusetts needs Amazon more than Amazon needs Massachusetts.

These bills are beings promoted as acts to protect “main street retailers.” But let’s be honest, if our residents were not purchasing their consumer goods from Amazon, they would be purchasing them from Target or Walmart - not exactly "main street". The fairness we are promoting is to allow large global retailers to be more price competitive with online retailers - which is exactly the opposite of what the U.S. Congress sought to foster in the 1990s.

In our rush to increase tax revenues, our Massachusetts legislature may simply be trading off one tax revenue for another - and with it adversely impacting their next potential high tech boom in our state.