Thanks in large part to massive budget shortfalls, a number of state governments in the U.S. have pushed for so-called 'affiliate taxes'. The idea is simple: by changing the laws so that online retailers with in-state affiliates are on the hook for collecting state sales tax, lawmakers believe they can increase revenue for their states' coffers.
For the most part, large online retailers have refused to play ball. Amazon, for instance, has cut off affiliates in states that have adopted, or contemplated adopting, affiliate taxes. Others have followed Amazon's lead.
Of course, this hasn't deterred other states from pursuing affiliate taxes of their own. While one affiliate tax bill failed to pass in New Mexico, another looks like it may pass in Colorado, where Overstock.com has already warned affiliates that they are on the chopping block.
The interesting thing about these bills is that they simply don't work. Rhode Island, which has an affiliate tax of its own, hasn't generated any revenue from it. That's according to a statement made late last year by the Rhode Island Department of Revenue, which admitted that it "[does] not believe that there has been any sales tax collected as a result of the Amazon legislation".
That's not exactly surprising. It doesn't take a degree in rocket science to realize that major retailers have every incentive to drop affiliates rather than pay sales tax in states in which they have no physical presence. After all, the amounts they'd pay in sales tax almost certainly far exceed the amount of business affiliates in those states generate for them.
Unfortunately, it's the states and their residents who actually come out the losers when affiliates get dropped. Needless to say, affiliates who can't do business with major online retailers likely earn less income, which means they pay less state income tax. And since they're earning less income, they probably don't buy as much locally, meaning they pay less local sales tax. So states like Colorado, which apparently already knows how it's going to spend all that phantom affiliate tax it won't be collecting, will probably only see less tax revenue from their misguided attempts to procure more of it.
Hopefully, despite the economic malaise, states will come to their senses and stop this nonsense. There's obviously a valid debate to be had about sales tax collection and online retail in the United States, but by using affiliates as a pawn, states are only hurting their most important sources of economic productivity: businesses and entrepreneurs.
Photo credit: jacreative via Flickr.