On the heels of similar announcements from Blue Nile and Amazon.com, Overstock.com said today it is cutting ties with its affiliates in California, Hawaii, North Carolina and Rhode Island because of legislation that requires the online retailer to collect sales taxes.
“It’s awful to have to terminate these relationships with affiliates simply because they live in states where unconstitutional laws are being passed,” says Patrick Byrne, chairman and CEO of Overstock.com. “However, politicians have to remember that a tax is a price that government charges for a service, and when they raise their prices, we're going to buy less of their services.”
Rhode Island's new law is effective; North Carolina, Hawaii and California have passed legislation, but those states' governors have not yet signed them into law.
The sales tax legislation, which is similar in each state, requires online retailers with affiliate web sites based in the state to collect and remit tax on all online sales to residents of the state.
Affiliate web sites host links to retail sites, enabling visitors to click through to complete a purchase. For example, a North Carolina-based running club might host a link to Overstock.com’s running shoe selection, and collect a percentage of each sale made through that link.
An important detail in the sales tax legislation is that e-retailers with affiliates in these states must collect sales taxes on all purchases made by state residents, not just on purchases originating at local affiliate web sites. That’s because the new laws determine that maintaining affiliate relationships is enough to establish a retailer’s presence in the state.
But Overstock and others are crying foul.
“Outside of Utah, we don’t have the type of operations that storefront and other retailers have, and we don’t impose the same burdens on local state infrastructure that locally based businesses do; therefore, imposing similar tax collection obligations on us in those states is patently unfair,” Byrne says. “When you come to realize that there are 7,000 taxing districts in this country, you get a glimpse of how big the burden would be. We, of course, do collect taxes, but only in states where we have physical operations—as the Constitution requires.”
The U.S. Supreme Court has ruled that online and catalog merchants can only be required to collect sales tax from shoppers in states where they maintain a physical presence, such as stores or warehouses. Consumers are supposed to pay their own sales tax on goods purchased online and through call centers if sales tax is not charged by the retailer, but consumers rarely do, tax experts say.
Meanwhile, as cash-strapped states search for quick answers to their budget woes, more are looking into collecting sales taxes on Internet purchases to bring in much-needed revenue. Connecticut is considering such legislation, while Maryland, Minnesota and Tennessee have considered but rejected similar laws.
Overstock and other big-name e-retailers, including Blue Nile Inc. and Amazon.com Inc., are fighting back. Amazon.com and Blue Nile have already severed referrals from Rhode Island and North Carolina online affiliates. And yesterday, Amazon cut off its affiliates in Hawaii. Overstock.com is the first of the three to end agreements with affiliates in California.
“We continue to evaluate whether or not to take similar action in additional states,” a Blue Nile spokesman says.
This is not the first time Overstock has cut off affiliates over taxes. In May 2008, Overstock.com canceled the contracts of over 3,400 of its New York advertising affiliates and sued the state when New York enacted the first in the series of Internet sales tax laws. The suit is still pending along with another from Amazon.com.
Shawn Collins, co-founder of the Affiliate Summit Conference, says states aren’t thinking about the long term impact of such laws.
“I can see from the states’ perspective that they think this is going to be an incremental tax they can collect, but they aren’t thinking of all the affiliates that will no longer work with Amazon.com and go out of business ,” Collins says. “They are not looking at the side effects like paying more unemployment. And the unemployed won’t be paying any taxes.”
Collins says several affiliate groups such as Affiliate Voice and the Performance Marketing Alliance have established grassroots campaigns to get the word out to lawmakers in several states about the downsides of Internet sales tax laws.
Overstock says it “plans to sever its affiliate advertising relations in each state that passes or appears to be close to passage of similar laws, and only reinstate these businesses in states were such laws are found unconstitutional, are vetoed or repealed.”
Amazon is No. 1 in the Internet Retailer Top 500 Guide, Overstock, No. 29, and Blue Nile is No. 56.
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