Brad Crooks, a Colorado-based photographer and affiliate marketer, has posted an important link on his Facebook wall — a link to Tax Foundation‘s new report on the harm and failures of the affiliate/advertising tax:
I have purposely highlighted, Brook Schaaf’s comment which I echo 100%. I agree that calling it an “Amazon tax” narrows (and shifts) the focus, and does a disservice to the affiliate marketing industry, hiding the real damage done to thousands of small businesses. I was happy to see though that the Tax Foundation has actually got their conclusions right, stressing that that such “taxes are unlikely to produce revenue in the near term”, burdening interstate commerce, and harming economic growth. Also, some states have already “seen a drop in income tax collections due to the law” instead of the originally projected budget increase [more here]. They will, because in states that decide to collect the affiliate tax, merchants (sad, but true) instead of collecting the tax, often choose to terminate their business relationship with affiliates, thereby removing their liability for the tax collection. Such merchant solutions cause a great harm to thousands of local affiliate marketing businesses, negatively impacting their income.
Thanks for this post, Geno. This tax, and many taxes on businesses in general, are bad for business. Businesses must make a profit to exist in the long run and therefore are forced to pass the cost of the tax on to consumers.
The result of this necessary behavior is that, in effect, consumers ultimately pay all taxes. That being the case, widespread taxation of business merely distorts the market, makes it harder to turn a profit, and raises prices for consumers.
Mike, thanks for chiming in. I share your concern about the tax ultimately raising the price for consumers, and making it harder to operate.
I also think the Colorado experience is teaching us that something like this can (and should) be solved/decided on the federal level as opposed to state-by-state contexts.
Finally, I just can’t understand those merchants that are terminating affiliates. I simply can’t!! Even if you do have to collect the tax, is it that difficult? Use Avalara or a similar solution, after all! As mentioned elsewhere, some online merchants are already collecting sales tax online, and consumers don’t mind.
Hey Mike & Geno,
The fact that we’re from sales-tax-free Delaware gave me the false sense that there was no imminent threat to my small business.
How wrong I was.
For starters, as an increasing number of states adopt this kind of legislation, there have already been some merchants who have chosen to just scrap their entire affiliate program. (Including those of us from Delaware, New Hampshire, Alaska & international affiliates.)
Worse still, now some networks & affiliates are pushing for a Federal across the board type of tax. And I hold serious misgivings about that. Here’s why: it won’t “level the playing field” between online retailers and bricks & mortar businesses at all.
It’ll tip it in favor of traditional businesses by eliminating one of the most important reasons customers even bother to buy anything online at all.
Our Albatross
The online business’ albatross is overcoming new customer trepidation about entering their credit card information -for the first sale. A close second is what to do about shipping and packaging costs.
The fact that up until now, customers didn’t have to immediately fork over the sales tax was/is important detail in persuading a customer to give an online retailer a try. With no immediate tax advantages AND with shipping & packaging costs many customers will simply shop around online, read reviews & then go to a neighborhood store – armed with the knowledge & desire to purchase that they gained from online retailers & their affiliates.
So, I’m going to go out on a limb and be one of the first to say that an across the board federal mandated tax or flat tax is a horrendous idea for e-commerce.
Hi Geno,
Sabrina I’ll join right in line behind you. I agree, any federal or flat tax is a really bad idea as well as state tax. You’ve already pointed out some great reasons of why it’s a bad idea as well I have witness first hand of state getting involved here in North Carolina last November.
N.C. wanted Amazon taxes from it’s affiliates, Amazon said no and both parties lose. Affiliates can’t work with Amazon, state still doesn’t get any money.
As federal and state tax agency’s are looking at ways to cut their problem deficits with short falls on their budgets, here in N.C. it only made the problem worst. In my area, there’s quite a few computer savvy unemployed people who turned to affiliate marking to make ends meet. Losing Amazon is a blow to them as well as everyone’s outlook on, what if federal wants to start collecting revenue from the internet market place now.
Sabrina, an across the board (all States), constitutional sales tax may be the only solution we Affiliates have, one I agree with and one Amazon would agree with also. Here’s what Amazon has to say about Colorado’s Affiliate Tax, HB1193 and it’s sales tax collection methods:
“We are not opposed to collecting sales tax within a constitutionally-permissible system applied even-handedly. The US Supreme Court has defined what would be constitutional, and if Colorado would repeal the current law or follow the constitutional approach to collection, we would welcome the opportunity to reinstate Colorado-based Associates.”
In above’s quote Amazon is being nice to Colorado. The Colorado Bill is illegal and unconstitutional and the proponents (Democrats) of this Bill know it, and they know they can ultimately lose. But, in the interim they can “say” (lie) how much income will be generated by their Bill and add it to the plus side of their budget balancing act. When it doesn’t quite pan out the way we Coloradans were promised…. well, we’ll just get the proverbial: “There’s been a slight miscalculation…….”
Sabrina, Kheley, Brad, thank you all of your input! It gives some good food for thought.
I can see how strengths and weaknesses can be found in both solutions (federal tax for all, or no federal tax and state-by-state laws). What I meant when saying that “something like this can (and should) be solved/decided on the federal level as opposed to state-by-state contexts”, I actually didn’t imply a tax for all, but a ruling/decision on the whole issue — hopefully based on whether it is good for the country’s economy to tax online sales or not.
Geno, we had a “ruling” on this issue with the Supreme Court’s 1992 Quill Corp. v. North Dakota decision — see http://www.taxfoundation.org/blog/show/963.html — and that established a national standard. What we have now are states challenging that standard and I suspect it will take another Supreme Court decision to settle this issue again for another decade or so. And then the process will repeat itself yet again I’m sure.
What I’d like to see is politicians put the welcome mat out for business. It’s good for job creation and good for the economy when there is a healthy and thriving business climate. There is no need to increase tax rates since increased tax revenues via the income tax, property tax, sales tax, etc. flows into the coffers under such a system.
Yes, Mike, I know about the Quill Corp vs ND case (I actually blogged about it in June of last year). What does need to happen is something as major as another Supreme Court decision, as you’re saying…
On the other hand, I fully agree with you on being business (and especially e-business)-friendly, and fully understanding the impact of such decisions. They don’t generate state revenue, but harm small businesses. In some cases, in a major way.