By Quentin Fottrell
Take note entrepreneurial bloggers and coupon websites: Overstock.com CEO Patrick Byrne vows to keep cutting ties with these marketing partners in states which require his company to pay sales tax for doing business with them. He has already severed his business relationships with thousands of so-called “affiliates” in Rhode Island, New York, North Carolina, Illinois and, most recently, Arkansas.
Marketing affiliates generally fall into three classes: loyalty/rewards programs, coupon websites and – perhaps most surprisingly of all – bloggers and Twitteratti that are trying to make a living from their websites and social-networking pages. Even celebrities count as affiliates if they are paid to Tweet about a particular product.
Some states require online retailers to collect sales tax if they have a physical presence. Otherwise, it’s up to consumers to keep their receipts and pay the tax. The problem for lawmakers: they don’t always do that.
States like Illinois now say that online retailers who pay these affiliates must contribute to the state’s sales taxes. Overstock cut ties with affiliates in Illinois to avoid sales tax as Overstock doesn’t have a warehouse or any bricks-and-mortar presence in that state. However, Overstock adds states sales tax in the check-out stage in any state where it has a physical presence like Utah, where it’s headquartered.
Making the issue even more complex: every online retailer is different, depending on the type of products they sell and the kind physical presence they may have in a particular state. For instance, items sold by Amazon.com, or its subsidiaries, and shipped to destinations in New York and certain other states are subject to sales tax. Amazon explains its own sales tax policies here.
But Byrne is not for turning. “We’re going to keep that as long as these states have these kinds of laws,” he tells Pay Dirt, “and anymore states that pass these law we’re going to do the same. The affiliate community is up in arms against these five states. We feel badly that we’ve had to sever ties. But we’re going to put more cash back in people’s accounts.”
Wal-Mart, Target, Home Depot, Sears and Best Buy and others have long complained that online retailers should pay sales taxes, contributing to the revenue of those states where they do business. More states are changing their laws to require businesses that pay marketing affiliates in that state to pay sales tax in that state too.
New laws requiring online retailers like Overstock and Amazon to pay sales tax come at a good time or a bad time, depending on how you look at it. Politicians face a choice: raise revenue by making sure all sales tax gets paid or look into raising other taxes.
Byrne doesn’t see an economic recovery anytime soon. “I’d say the wealthiest 20% customers are back shopping like it’s 2007,” he says. “The other 80% with lower incomes are still going through tough times and I think we’re looking at a double-dip recession. I never bought any of the stuff about recovery. I think we’re in for rough times financially in this country.”
He is using the affiliate money to reward customers: those who have spent over $300 in the past year receive free membership to the “Club O” customer rewards program and a bonus $10 balance. Qualifying Club O members get $10 added to their existing Club O account and their membership extended for one year.
Pat Quinn, the Democratic Governor in Illinois, signed a new law last month that defines online retailers using affiliates as now having a physical presence in the state.
Brie Callahan, a spokeswoman Quinn, says it’s a fair law. “More than 20,000 brick-and-mortar retailers are forced to compete with larger online retailers that have avoided collecting sale tax owed to the state of Illinois,” she says. “We needed to level the playing field for business owners who have played by the rules and require all retailers with affiliates in Illinois to collect the sales tax owed on purchases.”
Callahan says the law essentially switches that burden from individual taxpayers, who are required to report their receipts, to companies, adding that $153 million in sales tax is lost every year as a lot of people don’t know they’re supposed to report sales tax, or simply don’t do it.
Pay Dirt readers, where do you think the burden for paying sales tax should lie?