This first appeared in September of last year. This issue is currently dominating sales tax news again, mostly because of moronic politicians. So I've fluffed it up and reissued it. If you've read this before, I've added a few more politician jokes. They make it so easy.
In this past year, New York and a couple of more states* have made a very interesting play to create nexus for Amazon.com** in their states. I must give those politicians credit for creativity, but in the long run, it's not going to work. And it will hurt folks in their states as well. But politicians aren't rocket scientists, so we have to make allowances.
All of these companies** have "affiliate" programs. Individuals and small businesses put a link on their web sites so that whenever someone buys something through the link, they get a commission. Yay! Pretty simple. And a good way of generating traffic for the retailers.
But these politicians are arguing that an online store's "affiliates," who are merely living in their states, give the retailer a sufficient physical presence - or nexus. And maybe it does. But this isn't like a retailer building a warehouse or a store in the state. The retailer has no economic investment. All they have are affiliates in the state, who are basically small businesses and individuals. Therefore, it's very easy for the retailer to solve the problem if the state passes the law. Cut off the affiliate program in that state. Leave.
And that is precisely what the online retailers have done (except for Amazon.com in NY). They have skedaddled by cutting off those affiliates and therefore the commissions for those affiliates. And I can't blame the retailer. Sure, it'll hurt them because they've lost the revenue generated by the referrals, but I'm guessing that it's less painful than losing business in a state because they have to charge sales/use tax.
So the state gets no revenue anyway! The retailer has solved their problem by no longer having nexus in the state. And as an extra jab, the state has hurt their own people (voters) who have lost their affiliate income.
And, I repeat, the state won't get any of the revenue they were trying to snag anyway.
The irony is that this is such an easy law to get around. It's a shame that politicians (who generally don't get elected because of their SAT scores) can't see longer term than one budget cycle. They pass the law and the retailer cuts off the affiliates, making the law a waste of time. And they hurt the income potential of their own citizens . Really smart.
And what's to stop any potential or existing affiliate from setting up a virtual address in a state with no sales tax. If the retailer's records show they have an affiliate with an address in Delaware, and a banking and credit card address in that state, then New York or Rhode Island is out of the picture. Hmmmmm. Please keep in mind, I'm only thinking out loud. I'm SURE that won't work.
*Update: these states are either thinking about it, or have done it.
**Amazon.com, Overstock.com and others
Here's Amazon.com's page on sales tax.
The Sales Tax Guy
See the disclaimer - this is for education only. Research these issues thoroughly before making decisions.
Here's information on our upcoming seminars and webinars.
Picture note: the image above is hosted on Flickr. If you'd like to see more, click on the photo.