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Internet Tax Has Only Slight Effect

Yesterday,  I was talking with a merchant about the Internet tax situation. This merchant is concerned about the impact of collecting tax, they wonder if it would have an adverse effect on their customer’s shopping. My thoughts have always been that it would make little difference. I base this on my own experience and on discussions I have had with friends, family and even my website visitors. We shop online because it is more convenient. You can almost always find what you want in stock, it is usually delivered within a couple days and you  don’t have to deal with crowds or traffic. I am sure some people do shop online to save taxes but I wonder what the percentage is.

The  merchant I spoke with asked if I could find anything to back up my thoughts. He needs something to show his partner to convince him not to sever ties with affiliates in an affected state. I have begun researching to find data to back up my opinion. It didn’t take long to find information. I immediately found an article at Online Wall Street Journal.

An article titled “Amazon Fights Sales Tax Drive, Despite Modest Impact” written by By Scott Morrison of Dow Jones Newswires states that research has shown that sales tax collection has only limited impact with online sales.

But analysts said taxing Internet transactions would likely have a minor impact on the business of retailers like Amazon. Bruce Cundiff, an analyst at Javelin Strategy & Research, said Amazon has firmly established its reputation and relationships with online shoppers, and estimated a sales tax might reduce the company’s overall revenues by “low-single digit” percentages.

Mr Morrison also provided a quote from Bill Fox, one of the researchers involved in an University of Tennessee in-depth study of the impact of sales tax and online shopping. According to the article, Mr. Fox says that people are so comfortable with shopping online that sales tax has little impact.

In my opinion, “State and Local Government Sales Tax Revenue Losses from Electronic Commerce” By Donald Bruce, William F. Fox and LeAnn Luna, is a must read for everyone. A copy of this is available to read at the Streamlined Sales Tax Project ( Streamlinedsalestax.org )  website  Supporting Documents for Information on Federal Legislation for Streamlined Sales Tax. There is also a second article, “State Revenue Report for April 2009″ that contains fascinating information.

I will continue to look for additional research but this should serve as  a reminder to merchants, don’t make  decisions without knowing the true impact of collecting tax.

Like many others, I wonder why Amazon has decided to remove affiliates in some states with an Internet tax. Perhaps all the tax collection is just too much?

{ 2 comments… add one }

  • Cornelius Willis June 26, 2009, 3:02 pm

    Thanks for tracking all the activity on the “complex nexus” Sales Tax initiative that has such an impact on the affiliate business….I thought some clarifications might be helpful for your future reference. We’re a sales-tax-as-a-service company currently in development, optimized for small sellers.

    Here’s what we wanted to clarify: There are actually two remote sales tax collection initiatives being discussed in this article – and they are quite distinctly separate efforts. I know you are probably aware of this difference, but given the spotlight on the Amazon Affiliate business, many observers have confused them under the headline “Internet Sales Tax”. This is unfortunate as the two initiatives have dramatically different implications, legal precedents, and costs to consumers and internet merchants large and small.
    The first initiative is the Streamlined Sales Tax initiative-more on this in a moment.
    The second initiative is a radically different approach to taxation which redefines the concept of business nexus to incorporate a web of business relationships (i.e. “Complex Nexus”). This has been enacted in isolation by the State of New York, which has resulted in ongoing litigation between that state and Amazon.com and Overstock.com. As you are faithfully tracking, following New York’s lead, similar legislation is now being considered by California, Connecticut, Hawaii, Maryland, Minnesota, North Carolina and Rhode Island.

    The basics of this redefinition of nexus instruct that when an out-of-state company (let’s say “Company X”) pays a sales commission to a web site located in New York (“CompanyY”) for linking a customer from Y’s website to X’s website, then Company X has established economic nexus, and is then required to register as a business in that state – with full licensing obligations and tax collection requirements, just as if Company X had a “swinging door” retail location in that state.

    This approach seems to target the affiliate marketing business, (e.g. Amazon Associates, Commission Junction, Google Affiliate Network,Overstock.com, etc.) One of its unfortunate aspects is the requirement for merchants to separately navigate regulations with each of the taxing authorities, which is prohibitive for the millions smaller sellers that may make up more than half of internet commerce and a proportionate amount of potential tax revenue.(For more on the distribution of Internet commerce see “The Long Tail is Longer than You Think,” from the University of Maryland Business School http://www.streamlinedsalestax.org/Small%20Seller%20Task%20Force%20Committee/Documents/UMDRemoteSalesPaper.pdf.) Another implication of this approach is that other advertising-based relationships may also be incorporated into a concept of complex nexus…i.e. services such Google AdSense. Will pay-per-click and pay-per-lead be clearly delineated from commissions on sales? In theory, any direct response mechanism (or for that matter, any contractual relationship) could imply complex nexus.
    Probably the most fragile part of the complex nexus approach is its promotion of origin-based taxation, or taxation without representation.
    A sales tax, approved directly or indirectly by the voters of New York per the laws of that state, to pay for New York police, fire and hospitals, can and should be collected by merchants large and small, from the residents of New York. This is taxation with representation at its classical best, and is cleanly implemented by the Streamlined Sales Tax (SST) approach supported by a large crowd of commercial and government entities.
    This is not the same as the affiliate marketing (complex nexus) approach being promoted by the various states.
    A challenge with the complex nexus tax if it takes hold is that say for example, North Carolina dollars may be collected at New York state tax rates determined by New Yorkers , by New York affiliates, to pay for services for New Yorkers.
    Sales tax, in many places, is the law of the land, and the privilege of a computer, a credit card and an internet connection should not exempt a purchaser from that obligation.
    This is not the same thing as redefining place of business to include contractual relationships with out of state entities.
    Back to the first initiative, the SST is an approach to Internet sales tax resulting from 10 years of refinement and involving a collective effort of vendors, technology providers and 44 states. Participants include New York and the other states now considering legislation of complex nexus). SST is designed to simplify and standardize sales and use tax laws (including standard definitions for taxable goods, tax holidays, and rate change notices),with the goal of enabling out-of-state sellers to easily comply with local sales tax initiatives. Moreover, unlike the concept of complex nexus, SST is based on the extensive body of regulation and case law surrounding sales and use tax jurisdiction and liability. You can find out more about Streamlined Sales tax on our site(http://fed-tax.net) or at the SST Governing Board site (http://www.streamlinedsalestax.org)

    In 1992, the Supreme Court confirmed in Quill Corp. v. North Dakota that taxation of interstate retail transactions (at the time mailorder) were under the control of Congress. At that time, however, it was unrealistic to require remote sellers to keep track of many thousands of state and local tax codes, and thus interstate transactions have not to date been subject to taxation. But with the cheap computing resources and standardized tools available today, the technical capacity to keep track of hundreds of thousands of items, and tens of millions transactions per quarter is no longer in question. In fact, the continued commoditization of computing power is precisely what will enable SST to succeed.

    The reason destination-based sales tax works is because it is tax paid by the voters that vote upon, and benefit from, state sales taxes- the citizens of the states themselves. The SST initiative supports taxation WITH representation. States may choose to expand the definition of nexus to encompass complex business relationships, but this should not be conflated with SST.

    Cornelius Willis
    Co-Founder and Chief Sales and Marketing Officer
    Fed-tax.net
    http://www.fed-tax.net

  • Melanie June 27, 2009, 6:01 am

    Thanks Cornelius, I appreciate you taking the time to help inform my readers.

    The SSTP is responsible for some great research and for making information readily available to everyone. It seems to me that the SSTP is the direction we need to move. With all the advances in technology our country needs to modernize the sales tax legislation. The only other solution would be a flat line tax and I believe that would be impossible and impractical due to the variation in our states.

    On a personal level, I support the SSTP. As President of Affiliate Voice I have begun to examine if Affiliate Voice, as a group, should also support it.

    As far as the nexus laws, pending and existing, I again completely understand the need to modernize the laws. Technology has dramatically changed the way we shop- credit cards, Internet and improved delivery/transportation are to blame. Sales tax is a major source of income for states. With many individuals forgetting or not even realizing that they need to pay a use tax on their purchases (if sales tax wasn’t collected) it is easy to see the need to legislate and modernize our laws.

    Unfotunately, when this is attempted on a state level it is far too complicated. Merchants are put in a difficult situation; complying presents challenges. Merchants may also decide to remove affiliates in states with modernized nexus definition because they believe collecting sales tax will scare customers away.

    If these removals are done without truely understanding the impact of charging tax, everyone loses: especially affiliates. The attempt to level the playing field between online retailers and brick & mortar stores results in unleveling the playing field between affiliates from different states. Right now, affiliates in NY are at a disadvantage. Some merchants bar NY affiliates. Soon NY affiliates will be joined by affiliates in Hawaii and Rhode Island; even more to follow.

    The time is for Federal action. Make it mandatory and destination based. Simplify the process in every way possible. It is then that we will have a level playing field.

    Thanks again for stopping by and taking the time to comment. Very helpful!

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