Desperate State Governments May Drive Taxation of Crowdsourcing Income

Don Tennant

In my earlier post, "Taxation, Immigration Laws Need to Catch Up with Crowdsourcing," I wrote about work being done and income being generated over the Internet without any real attention being paid to the collection of tax on that income. That will assuredly change, and the change may well be driven by state governments growing increasingly desperate for revenue.


It is, after all, state governments that are busily reviving the on-again, off-again issue of sales tax on purchases over the Internet. reported on Sunday that about a dozen states are eyeing legislation to force online retailers to collect state sales tax, with the on-again focus being driven by the recession:

In 2008, as the Great Recession gripped the nation, New York passed the first law requiring online retailers to collect sales tax from residents by counting local Web site operators who direct traffic to sites such as Amazon as their physical presence in the state. The law became known as the Amazon tax, and Rhode Island and North Carolina soon passed similar versions.

Online retailers have no intention of going down without a fight, hoping to maintain the price advantage they have over brick-and-mortar outlets for as long as they can. As the article noted, Amazon is leading the charge:

Amazon retaliated by challenging the law's assertion that local Web site operators are part of its sales team -- the company considers them independent advertisers -- and the case is still winding its way through state courts. In Rhode Island and North Carolina, Amazon ended all contracts with local Web site operators, which one trade group said cut their revenue in half. Amazon has also sent letters threatening similar moves in states that have debated such bills, including Virginia.

Amazon is also playing the privacy card, claiming that a North Carolina effort to identify taxable sales by means of an audit of online retailers is unconstitutional. According to an article on on Sunday, Amazon is portraying itself and its customers as victims of an overreaching government:

Amazon's lawyers say the Constitution protects the company so that it "may sell - and customers may read, hear or view - a broad range of popular and unpopular expressive materials with the customers' private content choices protected from unnecessary government scrutiny. "To comply with their demand will reveal the personal preferences of North Carolina consumers," Amazon said in a statement. "Customers who fear that their purchases will not be private are less likely to purchase books, movies, music or other items that might be personal, sensitive or controversial," the company argued.

What's becoming apparent is that it isn't just sales tax that online operations will be fighting to stave off. As for-profit crowdsourcing grows in popularity, those companies will be just as eager to combat government demands for payment of tax on income generated from work performed over the Internet.


No doubt, Amazon will be on the front lines of that battle, too. Its crowdsourcing operation, Mechanical Turk, pays money to workers who perform piecemeal work on projects, and who are as unlikely to voluntarily pay income tax on their earnings as they are to pay sales tax on their purchases.


Mechanical Turk and other for-profit crowdsourcing operations, such as CrowdFlower and CloudCrowd, have every reason to want to maintain the de facto income-tax-free status quo as a competitive advantage over traditional manpower providers. But they should be prepared for battle with state governments that will either be emboldened by victory on the sales tax battlefield, or made even more desperate by defeat.

Add Comment      Leave a comment on this blog post
May 5, 2010 9:50 AM R. Lawson R. Lawson  says:

As much as I enjoy buying things tax free online, It does put brick and mortar business at a competitive disadvantage.  Simply put, it's not fair.

As far as my next Kindle or book purchase from Amazon, I agree that the government should not be told what titles I bought.  However, they should know that taxes were collected on all transactions should that become law of the land.  Somehow this has not been an issue for all the brick and mortar book stores that have been around since our country was founded, so I'm not buying Amazon's privacy argument.  I realize they are lawyers and trying to see what argument will stick.  I doubt this one will.

To Amazon's point regarding local websites that advertise a book for sale - I agree.  In this case we have three parties:  Amazon, Website owner, and Book buyer:

If a sales tax is applicable, Amazon should pay that tax to the state that the book buyer is from.  The Website owner will report all income from Amazon as earnings at the end of the year.  The website owner truly is part of an independent marketing team and not involved in the final transaction. 

It sounds like states want to lay claim to a sales tax based on where the website owner (independent marketer) resides - which will amount to double taxation and a convoluded tax system.  This is why the Federal government needs to address this issue instead of 50 state governments.


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