May 16, 2008, 12:00 AM

Overstock cuts off New York affiliates because of new state sales tax law

Overstock.com has notified its more than 3,400 New York-based affiliates that as of June 1 they can no longer provide advertising for Overstock.com unless New York changes its web sales tax law or the courts intervene.

Overstock.com Inc. has notified its more than 3,400 New York-based affiliates that as of June 1, they can no longer provide advertising for Overstock.com until New York changes its web sales tax law or the courts declare it unenforceable.

On June 1, a new law takes effect requiring Internet retailers to turn off their New York-based ad partners or collect up to 9.5% sales tax from New York e-commerce customers, says Patrick Byrne, Overstock.com’s chairman and CEO. “We love New York,” he says. “But New York’s new tax law required us to choose between New York customers and New York ad businesses. In the end, we chose our customers. The governor and legislature of New York should understand that a tax is a price that a government charges for a service, and when the price of anything is raised, people--including us--buy less of it.”

The law was challenged earlier this month when Amazon.com filed suit in the state’s Supreme Court to overturn the law. The complaint, filed against Gov. David Paterson, tax commissioner Robert Megna and the state’s Department of Taxation, involves recent additions to state sales tax law that require certain online retailers to collect and remit sales tax on purchases by New York residents.

Online retailers based outside New York currently are not required to process sales tax unless they maintain a physical presence in the state such as stores or warehouses--leaving Amazon and other e-retailers in the clear. But New York’s new sales tax law says that retailers have a physical presence, or nexus, if they do $10,000 or more in annual sales directly or through affiliate web sites based in New York.

Amazon contends in its legal complaint that web sites participating in its Associates Program place on their sites advertising links to Amazon.com after submitting an application on Amazon.com, and that the process does not require Amazon to have a physical presence in New York. “Amazon’s only contact with New York residents is by mail, wire, or common carrier,” Amazon says in the complaint. “Nor does Amazon have any representatives in New York soliciting sales on its behalf.”

Overstock agrees with Amazon that the law is unfair and unconstitutional. “We think the New York law makes no sense at all,” says David Chidester, Overstock.com’s senior vice president of finance. “We have worked to assure that Overstock.com has as small a tax footprint as possible because of the benefits it provides to our customers. We have no taxable connection to New York that is recognizable under constitutional principles laid down by U.S. Supreme Court decisions, and we will keep that status, even if it means having to say goodbye to some long-time New York business connections.”

Shawn Collins, an affiliate consultant who founded the Affiliate Summit annual conference, suggests that merchants look at the potential long-term loss of business before ending affiliate partnerships.

“A lot of affiliates were bothered by the sudden decision of Overstock, and some may be less inclined to go back to it if the New York sales tax law is changed,” he says. For many retailers, 98% of their affiliate business is from 2% of affiliates, and they should check how many of that 2% are in New York before abandoning the state, Collins says.

Overstock.com is No. 30 in the Internet Retailer Top 500 Guide and Amazon.com is No. 1.

Matt Williams, general manager, Webstore by Amazon, will be speaking at the Internet Retailer Conference & Exhibition, June 9-12 in Chicago in a session titled Amazon: Leveraging the expertise of the most successful e-retailer.

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