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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.

Patricio Robles

Published 2 February, 2010 by Patricio Robles

Patricio Robles is a tech reporter at Econsultancy. Follow him on Twitter.

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Scott Medlock

Exactly Right...  This isn't a case of expanding the pie...  It's removing a slice from consideration at all.

Let alone the conundrum of an Affiliate in Rhode Island whose link is for a Missouri Merchant with a network in Colorado that ships from New York.  In this instance, all four states would claim "nexus"... 

No wonder Amazon, Overstock, etc. just drop affiliates.  It's simply a can of worms.

over 6 years ago

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Ken Cheung

Totally agree, its absurd that the gov. think this will increase tax revenue, worse this, its counter productive to entrepreural sprit, and totally defeats the foundations upon which the internet has become known for. If they attempt to localize the internet it ultimately defeats the purpose.

in specific reference to affiliates themselves, if you consider the large 'super affiliates' most of these are fully fledged businesses, by killing their business model (founded on commission only income) you're killing SMEs...again, defeats the whole adgenda of gov. in trying to grow local businesses and gain more local tax from that channel.

over 6 years ago

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Scott Jangro

Very well said Patricio.  It is such a complex issue that it is difficult to be succint.  you've said it as well as I've seen.

Not to pick nits, but there's one point I'd like to clarify because I think being accurate is key to the fight so people can't say, "you don't get it".  The merchants like Amazon wouldn't be *paying* the tax.  They'd be *collecting* it from residents of the states that pass this legislation.  Colorado is the latest example.

The end result is the same.  This is a burden that Amazon and others don't want to bear.  It is also extra expense they don't want to impose on their customers if they don't need to.  It is much easier to just eliminate the criteria (the resident affiliates) that forces them to collect this tax.  Literally, they can just flip a switch and be done with it.

But again, well written.

over 6 years ago

Patricio Robles

Patricio Robles, Tech Reporter at Econsultancy

Thanks Scott. You are correct about the paying versus collecting part. Basically, nobody ever pays the use taxes they're legally 'supposed to' when they buy online, so it seems easier to shift the burden to retailers. Of course, compliance does come at a cost to the retailer.

over 6 years ago

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Chris

Also, think about it - why pay a commission to an affiliate + have the extra burden/cost of collecting sales tax?!

The DEMS in Colorado added an amendment to the bill that would exclude "electronic" referrals, but that is not enough. It takes one "shady" affiliate breaking the rules and Amazon is on the hook. They will not risk it. I think this amendment is also more something like a decoy and then to "lure" online retailers into the trap.

over 6 years ago

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Mike D

good points but one thing is wrong. Amazon/Overstock didn't drop affiliates in New York when they passed the bill. 

over 6 years ago

Alec Kinnear

Alec Kinnear, Creative Director at Foliovision

At some point, people will be paying taxes for online purchases. They do already in Canada and most of Europe.

Given the US budget deficit, either the US needs to start collecting sales tax on online purchases or stop its overseas wars. I'd prefer the second but I suspect they will go for the first.

Patricio, you are protected by police and drive on roads built by the state and more than likely were educated in a public school. Where on earth did you get the idea that taxless corporatocracy would do anything other than create poverty and misery and leave you the victim of a passing anarchist group.

Ayn Rand?

over 6 years ago

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