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In 2010, major online retailers in the United States which operate affiliate programs saw their businesses threatened by new state laws that would force them to collect state sales tax if they have affiliates in the state.

Despite the fact that these laws don't generate the revenue they're supposed to, and typically spark high-profile backlashes, it appears that the push to tax internet retail through 'affiliate taxes' will continue into 2011.

The latest state on the verge of implementing an affiliate tax is Illinois. If the state's governor signs a bill already passed by the state's lawmakers, companies that have affiliates in Illinois will be obligated to collect Illinois state sales tax when they transact business with Illinois residents.

The reaction to the situation is predictable: Amazon.com, one of the main targets of these tax laws, has sent an email to its affiliates in Illinois warning that they'll be cut off if the law is signed. And there's little doubt that Amazon.com will follow through on its promise; it has terminated affiliates in other states, something that probably wasn't so hard to do in light of the fact that being burdened with the logistics of collecting taxes across potentially thousands of localities in multiple states would cost more than the revenue affiliates generate for it.

That said, Illinois' attempt to force online retailers to collect sales tax is making for an interesting story because of some of the businesses that will be affected. FatWallet, for instance, a popular couponing and cashback site, is based in Illinois. Tim Storm, FatWallet's CEO, told the Chicago Tribune that the new tax law, if signed into law, would cost his company 30-40% of its revenue. "The reality is that as a business owner with 52 employees, we're not going to just get shut down because of a law Illinois passes," he told the Tribune. So FatWallet is looking at relocating to another state if it has to. The owner of another couponing website based in Illinois told the Tribune he'd do the same to save his company's revenue and 20 employees.

Forcing affiliates to flee would only further erode Illinois' tax base, of course, but there's good reason to believe that affiliates based in Illinois may not be the only ones who have to prepare for drastic action this year. States across the U.S. are hurting, and some will likely turn to affiliate taxes in search of revenue. One possible biggie: California. Former governor Arnold Schwarzenegger previously vetoed a bill containing an affiliate tax law, but the state's new governor just might sign one, so some in the affiliate marketing community are already predicting that a bill containing an affiliate tax will surface again.

If two big states with lots of internet companies like Illinois and California force the Amazon.coms of the world to ditch their in-state affiliates, it could be a nasty year for affiliate marketing in the U.S. as a whole.

Photo credit: jacreative via Flickr.

Patricio Robles

Published 10 January, 2011 by Patricio Robles

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

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Comments (2)

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Jose

I'm confused. I thought that the government already takes around 25% of income from your taxes. So aren't they already getting money off your profits? Would this be in addition to the regular taxes or what? Someone please explain!

over 5 years ago

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Avalara

Amazon is playing hardball with Illinois, and several other states -- even municipalities like San Francisco. It's a high stakes game, and I wonder if Amazon has a Plan B if states start winning court cases.

over 5 years ago

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