Web retailers, states tussle over tax rules

In a big break for online shoppers, Web retailers generally don't have to charge sales taxes in states where they lack a store or some other physical presence.

Increasingly, states aching under the weight of the recession are seeking a way around that rule. Because companies like Amazon.com Inc. get help drumming up sales from online affiliates — people who link to products on their blogs, promote Web shopping deals and offer coupons — several states say the Internet retailers should charge sales taxes in states where those affiliates are based.

The financial benefits may not be quite what the states anticipate, though. Rather than gearing up to collect taxes, Amazon and other Web retailers are simply shutting down their affiliate marketing programs. As the small businesses that participate in these programs get cut off, a state could lose tax revenue rather than add to it.

A look at what the affiliates do helps explain why. They're just one of several methods that e-commerce companies have for driving visitors to their websites, so nixing them is not necessarily a big loss for the companies.

It's a far bigger deal to people like Rich Owings.

By running websites like GPSTracklog.com from his home in Asheville, North Carolina, Owings serves as an affiliate for Amazon and other companies. Owings, 53, spends most of his time reviewing GPS gadgets and covering industry news. He links to navigation products of his choosing on Amazon's site, and if his readers click through and buy one, he gets a commission.

Owings estimates he brought in about $80,000 in affiliate revenue from various companies in 2008, about $50,000 of which came from Amazon. After Amazon recently shuttered its North Carolina affiliate program in response to that state's attempt to collect sales taxes, Owings said he and his wife were thinking about heading elsewhere to run their business.

"We're terrified," he said. "We just bought a house here a year ago and we're looking at having to move out of state just to keep our business going."

The amount of money at stake overall for state governments is somewhat murky. According to a recent University of Tennessee study, uncollected state and local taxes from online sales could total $7 billion this year. However, only a small part of this would stem from consumer purchases, because transactions between businesses make up the bulk of e-commerce sales. (Consumers are generally supposed to pay a "use tax" themselves on online purchases, but few do.)

Because any extra revenue is precious, several states, such as New York, have passed laws seeking to cash in on Web retailers' affiliate relationships, while others are considering doing so.

Amazon cut off affiliates in North Carolina in late June, anticipating legislation requiring it to collect sales tax will soon pass there. The company has also stopped working with affiliates in Rhode Island and Hawaii because of similar laws that already have passed. (Hawaii's Republican governor, Linda Lingle, vetoed the bill Wednesday, so Amazon plans to reinstate affiliates there if the state's Democratic majority does not override Lingle's decision.)

Discount retailer Overstock.com Inc. and online jeweler Blue Nile Inc. have also closed down affiliate programs in Hawaii, Rhode Island and North Carolina, and Overstock stopped working with affiliates in New York last year.

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