There is a lot of upset over the new internet sales tax laws that apply directly to online sales, and are already hitting some affiliates hard.
These laws require online merchants to collect state sales tax if they have local affiliates in those states. The states currently affected include California, Hawaii, North Carolina and Rhode Island - but many other states are in the process of following suit...
Merchants have always been responsible for sales & use tax on sales made within their own state whether that be online, offline, or mail order sales. The new laws propose that online merchants should also pay state sales tax in certain states where they have affiliates. The argument being that their affiliates represent a "physical presence" in that state.
A handful of cash-strapped states have weighed laws that would use the presence of affiliate marketers to force e-commerce companies into collecting sales tax. source
The New York State legislature has included a provision in their $122 billion budget. About $50 million of this is meant to come from a tax on some online retailers. (source no longer available)
How will the new internet sales tax laws affect you, as an affiliate marketer or as an online merchant? Good question.
So far the damage appears to be fairly contained, directly affecting affiliate marketers in the 4 states mentioned and larger online retailers that ship physical products.
You have probably already heard the news of Amazon.com dropping affiliates in certain states, but here is a list of merchants that dropped affiliates in New York: Merchants that Dropped New York Affiliates (link no longer available).
Merchants are fighting back
Dropping their affiliates in the affected states is a direct message to that state regarding their disagreement with the new internet sales tax laws. Basically, they are refusing to pay the additional state sales tax by pulling their affiliate program in those states.
"It's painful to have to terminate these relationships with affiliates, simply because they live in states where counterproductive (and likely unconstitutional) laws are being passed," said Patrick Byrne, Chairman and Chief Executive Officer of Overstock.com. source
The states that are looking at passing this provision to their sales tax law obviously want to increase their tax revenue. Unfortunately, given the widespread response by major online merchants, the new laws will create hardship on their local citizens - ultimately damaging their local economy even further.
Imagine for a moment that you live in New York, and earn a healthy 6-figure income from your affiliate sites. You pay income tax, and contribute to your local community. You are one person. In steps this law, your primary merchants drop you as an affiliate, your income drops to below poverty level practically overnight. (Overstock.com dropped 3,400 New York Affiliates)
Amazon.com and Overstock.com, two of the internets largest retailers, have both filed lawsuits against the state of New York. Overstock dropped the NY affiliates, while Amazon decided to pay the sales tax on sales made by NY affiliates pending the outcome of the lawsuit.
The outcome of those lawsuits, and each states response to their lack of participation in sales, will ultimately influence the future of online sales and affiliate marketing.
Personally, I applaud the merchants for taking a stand, and the affiliates who have written to their state representatives regarding the new internet sales tax laws. Affiliates in the affected states are currently taking the hardest hit, but this is something we should ALL be paying close attention to.
Will the Internet Sales Tax Laws affect you directly?
If you are an affiliate in California, Hawaii, North Carolina or Rhode Island then you have probably already experienced immediate termination by certain online merchants. What about the rest of us? You need to keep an eye on your state, because you may just be next.
The question has been raised by independent merchants, regarding their sales tax obligation in these states where they may have active affiliates. To date, the laws are obviously targeting the larger online retailers.
New York, for example, has a $10,000 threshold:
If an online retailer did not make at least $10,000 in gross sales to New York residents, they are not obligated to collect sales tax. (source no longer available)
It seems obvious that they are also targeting the sale of physical products. But don't get too relieved just yet if you only deal in ebooks and virtual products. New York also wants to impose a 4 percent sales tax on online downloads of music, ring tones, games, movies and other media from online retailers. source
Are smaller retailers and info-products next on the list? Obviously that depends on each state, the outcome of current lawsuits, and the response from buyers and sellers alike. As I said, this is definitely something we all want to keep an eye on.
In the meantime, I suggest "business as usual". Do not let this deter you from setting up affiliate sites or starting your own affiliate program. I live in Tennessee which is so far unaffected, so I plan to continue managing my affiliate sites and setting up new ones.
If you live in the affected states, and worked directly with merchants who are declining affiliates in those states, look for independent merchants to work with. Worst case scenario, you can sell profitable affiliate sites to someone in another state. Partner with someone in another state. Remove affiliate links and monetize with Adsense and advertisers temporarily until things (hopefully) resolve. Create your own info products, etc.
I'd love to hear your thoughts on these new Internet Sales Tax Laws that seem to be spreading through the states like wildfire. And affiliates from California, Hawaii, North Carolina and Rhode Island - We'd love to hear from you! What are you experiencing on your end, and what is your recovery plan?
Resources Related to Internet Sales Tax Law:
- Internet Taxes, Wikipedia
- Overstock.com Drops Internet Affiliate Advertisers in California, Hawaii, North Carolina and Rhode Island.
- Amazon Cuts Ties to Affiliates in Hawaii
- The ‘Amazon Tax’ and the ‘iTunes Tax,’ Compared
- Dear Legislators – The Amazon Tax Won’t Raise Tax Revenue
- NY’s “Amazon Tax” Takes First Casualty: Overstock Affiliates
- Amazon Affiliate Tax Solution