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States Attempt to Cash In From Online Sales

July 3, 2009

In light of the current economic recession, some states are seeking ways to detour the current laws that state that businesses which sell goods and services online are not obligated to pay sales taxes on sales to customers outside of the state they reside.

More and more, customers are turning to online retailers such as Amazon.com Inc. as sales continue to rise, but many states are now hoping to get their cut from such sales based on the presence of online affiliates who link to products on their Web sites to increase sales.

But states may not see their cut from such initiatives, because as they begin to propose changes to tax laws, online retailers like Amazon are beginning to cut ties to their affiliates, which could amount to an overall loss in tax revenue rather than a small increase as the states initially planned.

The Associated Press cited a recent University of Tennessee study that estimated uncollected state and local taxes from online sales could total $7 billion this year.

But, because transactions between businesses make up the majority of e-commerce sales, a very small amount of the $7 billion would come from consumer spending, the AP said.

New York is one of several states considering plans to get their cut from the revenues generated by Web retailers and their marketing affiliates.
But retailers are paying close attention as well. In light of pending legislation in North Carolina last month that would seek to collect sales tax, Amazon cut its ties with affiliates in the state.

Additionally, Amazon has ended its dealings with affiliates in Rhode Island and Hawaii because of laws that have already been passed.
Other retailers Overstock.com Inc. and jewelry marketer Blue Nile Inc. abruptly ended their relationships with marketing affiliates in those states due to legislation.

Rebecca Madigan, founder of the Camarillo, Calif.-based Performance Marketing Alliance, told the AP that the states are “sort of shooting themselves in the feet.”

She argued that marketing affiliates are actually advertisers, not salespeople.

“They don’t deliver product, they don’t take any money from a consumer, and most of the time they don’t even know who the consumer is,” she told the AP.

But Matt Anderson, spokesman for the New York’s Division of the Budget, said the new legislation simply represents the state’s effort to keep up with changes in technology in the marketplace.

“We believe we have to keep the tax code in line with technology, and that online retailers shouldn’t have an unfair competitive advantage over off-line businesses,” Anderson said.

He told the AP that the state expects the new provisions will amount to $23 million for the fiscal year that ended March 31, and estimates $34 million for the current fiscal year.

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