August 19, 2011, 12:30 PM

Dealing with the tax man

E-retailers take different approaches to mitigate the impact of collecting sales tax.

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As more states enact laws that require Internet retailers to collect sales tax, retailers are crunching the numbers to figure the best way to either abide by or avoid such laws.

California, is one state that recently passed a law requiring online retailers to collect sales tax if they get business from in-state web site affiliates. In response, Houston-based web-only retailer Blinds.com, No. 215 in the Internet Retailer Top 500 Guide, decided to sever its ties with its affiliates there and in several other states that passed similar laws. But the decision wasn’t easy, says chief marketing officer Daniel Cotlar.

“It’s taken years to build these affiliates relationships,” Cotlar says. He adds that Blinds, which connects with affiliates through Rakuten Inc.’s LinkShare affiliate network, spends a lot of time and money searching for the affiliates best suited to represent Blinds.com. It looks at affiliates content and visitor profiles, and analyzes the sales from customers who arrive on Blinds.com from an affiliate.

The window treatments retailer gets about 5% of its business through affiliates, and by cutting a quarter of them it has forfeited about 1% of its sales. But Cotlar figures the loss of sales that could result from charging sales tax to California residents would be worse. “I’d rather take a risk on losing that 1% than risk alienating a whole bunch of customers with sales tax, plus having to absorb the cost to us of collecting tax,” he says.

Cotlar adds that devoting the time and resources necessary to collect sales taxes would take away from Blinds.com’s ability to focus on web site improvements to maintain its growth in sales, which so far this year are running about 25% over last year.

Other retailers take a different approach. One Midwest-based sporting goods web-only retailer, who asked to remain anonymous because it considers this a “politically and publically sensitive matter,” says it initially planned the same approach as Blinds.com, but decided against severing its affiliate ties in California after realizing that such a move would have to also include cutting its business ties with two big California-based e-marketplaces, eBay.com and Buy.com.

“At first we did the math if we collect sales tax in California, and the math indicated we’d be better off cutting off our affiliates,” the retailer’s manager of e-commerce says. “But after we started to read the California law, we concluded that any e-marketplaces based in California operating on a commission basis with other retailers could be subject to the nexus law.”

So the retailer now has a multi-pronged tax collection policy: It has severed its affiliate relationships in New York and the other states with affiliate tax laws to avoid collecting tax in those states, but it collects sales tax in two Midwestern states where it has physical operations and in California.

 

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