Should States Tax Online Affiliate Programs? Overstock and Amazon Say No Way

Last year, New York and a few other states started taxing online affiliate programs, in which website operators link to retailers and then get a commission on any business generated from their site. The logic behind it was that online affiliates constituted a "physical presence," akin to having a plant, warehouse, retail store, etc.

While the Supreme Court ruled in the early '90s that it was too onerous to expect catalog and online retailers to collect sales tax in the 7,000 taxing jurisdictions in the U.S., everyone involved agrees that if you have a bricks-and-mortar operation somewhere, you must collect the relevant sales tax. Hence, Utah-based Overstock collects tax on sales within the Beehive State. But in the wake of the New York law, Amazon and Overstock pulled their affiliate programs for Empire-State-based websites and launched a still-pending suit to overturn the law. Thousands of websites were shut out of affiliate status as a result.

Due to similar laws, reports the Los Angeles Times, Overstock has just pulled its online affiliate program from California, Hawaii, North Carolina, and Rhode Island. Amazon has also pulled its program from Rhode Island and North Carolina.

"It's awful to have to terminate these relationships with affiliates simply because they live in states where unconstitutional laws are being passed," said Patrick Byrne, Overstock.com's chairman and chief executive. "However, politicians have to remember that a tax is a price that government charges for a service, and when they raise their prices, we're going to buy less of their services."

LA Times bit here.

Byrne and others argue that catalog and online retailers shouldn't have to pay the same type of tax because they don't put the same sort of stress on services and infrastructure that local businesses do. As he told Reason.tv in a recent interview, Overstock and its employees aren't using as much water, electricity, health and education services, you name it, in places where it simply ships in merchandise.

What do you think, Hit & Runners? Is that a good argument, persuasive even to those who disagree initially?

Here's Byrne talking it up at Reason.tv (go here for embed code, related vids, etc):

Comments

[Fluffy]

The affiliate link is an advertising link. No more, no less.

Therefore the use of the affiliate link should only trigger the sales tax if the use of, say, an advertising agency based in New York would require you to pay sales tax on all sales generated in response to that ad campaign. Or if running a TV ad in a state meant that you were deemed to be doing business in that state.

[Martin]

I'm not exactly sympathetic to any kind of tax, although I don't fully buy Byrne's argument, either. (You really think those taxes are to pay purely for the services you consume?) It doesn't make much sense to tax an Amazon affiliate in RI, for example, if somebody in TX uses them to make a purchase.

Of course, what's supposed to happen, at least in CA, is that the purchaser declares and pays Use tax on the out of state purchase. So if I buy something online and have it shipped here to CA it's my responsibility to pay the tax to the state. Ha. I know precisely one person who has actually done this - everybody else buys online with impunity because Use tax laws are essentially unenforceable.

It gets better. If you buy something from a vendor in another part of CA which has a lower Sales tax than your area (factoring in all the local add-ons) then that vendor is only responsible for collecting the tax that applies in their area and you, again, are responsbile for declaring the balance of the Use tax.

In short, Sales and Use taxes are a mess. Amazon, Overstock and their ilk can't really do much other than sever ties with these states until the mess is sorted out.

[Agammamon]

If the taxes aren't to cover services received from the government, then what are they for?

[Episiarch]

So not only does this remove business from affiliates, it means less shit gets sold when the government is ostensibly wanting to "stimulate" consumer purchases. Fucking brilliant.

[David]

The long term solution is to run your company from space and ship stuff through the atmosphere directly to your customers' doors. It's the final frontier.

[Gilbert Martin]

"Of course, what's supposed to happen, at least in CA, is that the purchaser declares and pays Use tax on the out of state purchase. So if I buy something online and have it shipped here to CA it's my responsibility to pay the tax to the state. Ha. I know precisely one person who has actually done this - everybody else buys online with impunity because Use tax laws are essentially unenforceable."

Legally, that's the way it is in every other state as well. The tax is supposed to be a tax on the instate customer and the retailer is the just press ganged by the government into being it's unpaid tax collector.

So theoretically it could be said that the tax is going to pay for the instate services that the customer is using.

Of course, in a lot of cases, it isn't any such thing. It's actually a tax that forces the customer to pay for some service/benefit/handout that is being provided to SOME OTHER instate resident. Such as paying for somebody else's kid to go to school.

[wgh]

There is something Amazon isn't telling you. These taxes are still supposed to be paid by the affiliate. Amazon requires all affiliates to sign a contract that they are liable for the local sales taxes on the purchase. But Amazon won't charge the customer for the sales tax. So the affiliate is supposed to pay it out of their profits on behalf of the consumer. Similarly when postage rates went up Amazon refused to raise their postage rates telling affiliates that the old rates applied, even though in some cases this meant affiliates were now losing money. Amazon told the affiliates that they had decided in was not in the interest of the affiliates to pay them full compensation for the postage they use.

It will be interesting to see what happens when more states do this. Maybe Amazon will put out of the US entirely. But I'm a very disgruntled affiliate of Amazon who is slowly ending all my relationships with them. They treat their affiliates very, very badly. The sales tax issue is one of them. We pay it out of our pockets but Amazon won't let us collect it from the customer. Amazon is upping their commissions in numerous ways and squeezing the affiliates slowly. We getting out as soon as we can.

[Alan]

I would be more sympathetic to the sales tax argument if one could deduct the shipping costs, which, excepting small, high value items, are generally larger than the sales tax anyhow.

I do recognize that taxation is a necessity, but again, I would be more sympathetic if the various governments spent their money on something other than violating human rights.

[Bob Smith]

Is this just about sales taxes? I'd be more worried about my affiliates creating nexus for income tax purposes. California and New York in particular have been especially aggressive at trying to attribute nexus to out of state businesses. New York, you may recall, even went to far as to demand income tax on the salary of out of state employees of New York companies.

[Pro Libertate]

Making nexus more tenuous is a bad idea. If states simply must tax on-line and catalog sales, rather than create a bizarre case for nexus (and New York really stretches reality and ignores treatment of other industries in its desire to reach affiliate marketers), then they need to come to some sort of sales tax simplification arrangement.

The big problem is that if the affiliate creates nexus, then all of, say, Amazon's sales into New York are taxable. Do New York-based advertising agencies create nexus for the same reason? They should, but let me venture a guess that New York won't run off Madison Avenue any time soon.