April 4, 2011, 3:07 PM

As part of tax fight, Overstock to reward customers in states where it cut off affiliates

The potential $4.5 million promotion is the latest development in the online sales tax battle.

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Hoping to turn its opposition to online sales taxes into increased customer loyalty, Overstock.com announced today a plan to shift money from affiliate programs shuttered because of newly enacted sales tax laws to consumers taking part in the e-retailer’s Club O rewards program.

The promotion applies to online shoppers in the states of Illinois, New York, North Carolina and Rhode Island. Each state has enacted laws that require Internet retailers to collect state taxes if they work with in-state affiliates, which are web site operators that provide links to products sold by web merchants and then receive commissions on those sales. State officials say affiliates constitute an online retailer’s physical presence in a state, satisfying a legal requirement that lets the state require online retailers to collect the taxes. Overstock calls such laws unconstitutional and, along with Amazon.com, has cut ties with affiliates in states that have enacted the tax laws.

“We have decided to sever our relationships with thousands of marketing affiliates in those states, take the money we would normally pay those affiliates, and use it to reward our best customers in those states,” says Patrick Byrne, CEO of Overstock, which is No. 28 in the Internet Retailer Top 500 Guide.

Overstock says it will use the money it would normally have paid those affiliates to reward its top spenders in those states. Customers from those four states who spent at least $300 last year with Overstock will receive a free membership in the retailer’s Club O reward program. The membership normally costs $20 and entitles Overstock shoppers to free shipping, promotions, 5% rewards on purchases and the chance to spend rewards on other products. Those top spenders also will receive $10 in their Club O accounts.

Overstock estimates that 150,000 customers are eligible for the promotion, which would put the cost at $4.5 million, assuming that each customer receives a membership as well as the rewards.

Lawmakers have passed a similar online taxing law in Arkansas. The bill awaits the signature of the governor, who has indicated he will sign it. Lawmakers in California also are considering a similar tax. Meanwhile, retail chains such as Wal-Mart Stores Inc. and Sears Holding Corp., No. 6 and No. 8 in the Top 500 Guide, respectively, have invited former Amazon and Overstock affiliates to join their e-commerce organizations. Those big chains must collect sales tax in any state in which they have a store.

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