Wednesday, February 24, 2010

Amazon.com and Affiliate Programs - Updated and Refreshed

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.

Virginia
Maryland
Rhode Island
California
New Mexico
New York
Hawaii
North Carolina
Illinois
Vermont
Mississippi
Colorado

**Amazon.com, Overstock.com and others

Here's Amazon.com's page on sales tax.



The Sales Tax Guy
http://salestaxguy.blogspot.com

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5 comments:

Ms said...

If most states set up similar laws it could create an incentive to collect sales tax if substanial revenue is generated from affiliates. In NY you can have affilates w/o nexus if they sign a contract. As far as evading the tax by switching addresses the problem is that most states will define affiliate as a resident and therefore affilate programs run by credit card companies will create nexus for many many online companies.

Jim said...

First sentence: Not sure that all most states will do that. Big "if".

Second sentence: Not sure what you mean there.

Third sentence: I did not suggest "evading" tax. I was merely speculating. But if the mailing address and bank were in Delaware, how is anyone going to know the affiliate actually resides in NY?

Just sayin'. (grin)

Jim

Ms said...

With the tremendous budget problemsI think many states will attempt these nexuses gambits and the supreme court recently has shown (capital one) they are not going to stop it.

In NY if your affiliates sign a contract stating they will not solicitate sales other than by the link through the website then no nexus is established.

The big affiliate programs like chase rewards plus for example would have nexus wherever they are a resident not just where there mailbox. In addition when an audit is done on the company you should be able to easily establish where an individual really resides from the 1099 issued. In NY the threshold for affiliate sales is 10,000 a year.

One positive aspect may be that companies that collect sales tax will have an advantage by still being able to offer afilliate programs.

BTW you have an excellent blog.

Anonymous said...

Your post touches on another -- Constitutionally unresolved -- issue: If you have nexus, can you get rid of it? For example, say you have clear-cut physical presence (e.g., resident sales person, multiple business incursions over a short time period, etc.), once you end that physical presence, how much longer can the State exert sales/use tax jurisdiction? Not at all? One reporting period? A year? Or, maybe, the State has you forever. This, of course, is "herpes nexus" (once you got it, you always got it). -- Schmajo

Jim said...

Thanks to Ms for the nice comment.

And to my good friend anonymous, I love it when people bring up an issue I've got an article about!

http://salestaxguy.blogspot.com/2009/09/here-are-some-answers-to-age-old.html