July 2, 2009, 12:00 AM

Two states think better of imposing sales taxes on e-retailers

Threats by retailers to end affiliate marketing relationships in states trying to tax sales generated by affiliates have had an effect. The governors of California and Hawaii have vetoed legislation that would have imposed such taxes in those states.

Threats by retailers to cut off affiliate marketing relationships in states that are trying to tax sales generated by affiliates have had an effect. The governors of California and Hawaii have vetoed legislation that would have imposed such taxes in those states.

The governors acted after such major online retailers as Amazon.com Inc., Blue Nile Inc. and Overstock.com Inc. began this week cutting off affiliates in states that adopted laws requiring collection of sales taxes by e-retailers with affiliates in those states.

California Gov. Arnold Schwarzenegger yesterday called Overstock CEO and chairman Patrick Byrne to say he was going to veto the sales tax legislation. "We couldn`t be more pleased to have been directly told that the governor is going to focus on balancing the budget via cost cutting and not by jamming consumers and small businesses with new taxes,” Byrne says. “I compliment Governor Schwarzenegger on getting it right."

Overstock reinstated relationships with its California affiliates following Schwarzenegger’s call, and resumed relations with affiliates in Hawaii today after getting news that Gov. Linda Lingle had vetoed that state’s sales tax law yesterday.

Lingle said the law would "place Hawaii companies at a competitive disadvantage," preventing them from receiving affiliate commissions from advertisements on their web sites. “I am vetoing this bill immediately to help ensure Hawaii is not economically hurt by legislation that was not well thought-out and would have negative consequences for non-profits such as the University of Hawaii bookstore, and businesses throughout our State,” Governor Lingle said.

A spokesman for the governor says the University of Hawaii bookstore is an Amazon affiliate and that its management expressed concern that it would lose revenue as a result of the bill being passed, given that Amazon was severing relationships with affiliates in states with similar laws. He adds that while the Hawaii legislature can still override Lingle`s veto, legislators have indicated that it`s not likely they will do that because of a technical flaw in the bill.

Byrne welcomed Lingle`s veto. "Today we cheerfully comply with Governor Lingle`s request that we promptly restore our relationships with her state," Byrne said. "We are more than happy to do so and thank the governor for seeing clearly on this bill."

Overstock also cut ties this week with affiliates in North Carolina and Rhode Island over legislation that requires the online retailer to collect sales taxes as a result of having affiliate relationships in those states. The retailer says it remains committed to not doing business with affiliates in those states.

If the California affiliates law had taken effect, Overstock would have found it uneconomical to continue doing business through the 279 affiliates it has in that state, Byrne says.

He notes that in New York, where Overstock has stopped working with affiliates because of a similar law in that state, affiliates represent about 1% of Overstock’s business and about 0.05% of its net profit there. But because New York represents about 10% of Overstock’s overall sales, it doesn’t make economic sense to maintain its affiliate relationships there, he says. “It comes down to, do we start charging sales tax on 10% of our business or give up 0.05% of our profit?” he says. “Even setting aside the additional costs of collecting and remitting sales tax, the economic effect is so horrible, it’s better to give up affiliate sales.”

Overstock is No. 29 in the Internet Retailer Top 500 Guide, Amazon.com No. 1 and Blue Nile No. 56.


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