To collect or not to collect: That’s the weighty question for online retailers when it comes to state and local sales taxes. In the past, online retailers were not required to collect sales tax if the company did not have a bricks and mortar presence in a given state. Those days may be ending very soon. As of February 2012, a dozen states have enacted legislation that would force online sellers to collect sales tax and 10 more states have similar bills pending.
Don’t think that if you are an affiliate marketer (one who makes money online by using links to other online retailers), this new development won’t affect you. The sales tax question could very well change the way buyers and sellers interact online for years to come.
Pros of Collecting Sales Tax
The chief argument for collecting sales tax from all online retail transactions is to create a so-called level playing field between local retail stores and their virtual competitors. Currently, local retailers (who are required by law to collect sales tax) complain that they can’t compete with online sellers, like Amazon.com, who don’t have physical retailer outlets and therefore don’t have to collect tax. These traditional retailers maintain that they can match the price of an item, but they can’t tell the customer that they won’t charge tax.
Another reason states are clamoring to enact online sales tax bills is to help rebuild state revenue lost during the recession of the past five years. The National Conference of State Legislators estimates that the amount of “uncollected” sales tax to be around $23 billion in 2011. That’s powerful motivation for states to enact sales tax bills.
Arguments against Online Retailers Collecting Sales Tax
Online retailers are understandably against such sales tax legislation. Among their arguments for keeping the current system is the collection nightmare that sales tax legislation would bring to large retailers like Amazon.com. Such sellers would have to collect hundreds of different taxes for different states, counties and municipalities. Getting these funds to the proper places would require additional staff and additional costs.
How the Sales Tax Question Could Affect Affiliate Marketers
If you’re thinking that the sales question won’t affect the revenue you collect from sales made by visitors to your Web site via affiliate links, think again. In this fragile economy, any increase in price will likely mean fewer sales and, thus, fewer commissions. What’s even more frightening to affiliate marketers is that some states, such as Illinois, are requiring any affiliate with a business in the state to collect and remit sales tax on third-party sales. Clearly, the state legislature doesn’t understand the affiliate marketing business model, but such a move could cripple or bankrupt thousands of small businesses before any modification in the bill could occur.
The final decision on collecting sales tax from online sales is still to come, but this issue bears close monitoring for any company that even dabbles in affiliate marketing. The shape of ecommerce as we know it could very well change in the next few years.
The state of California is again studying the implementation of a tax on sales of goods or services at Amazon.com and other affiliate programs. A similar measure passed by the state house and senate was vetoed by Governor Arnold Schwarzenegger in the autumn of 2009.
As it stands today, California residents are supposed to declare the value of all online purchases. The effect of this legislation transfers responsibility for paying taxes on online purchases from consumer to seller. Naturally, online merchants are reluctant to visibly increase prices by 8.25%. Affiliate programs are also reluctant to assume the costs of calculating, tracing and paying sales taxes in differing jurisdictions.
Facing an estimated $20Billion budgetary deficit, the state government is believes it can reap over $175million from a California affiliate tax. Unfortunately, the state legislators might not have thought this plan fully through.
The introduction of similar taxation programs by other state governments have resulted in affiliate networks abandoning those states. When affiliate programs leave a state, they also leave all affiliate marketers in that state. Ultimately, the effect of affiliate taxation tends to be a reduction of realized revenues as the state loses taxes on the incomes of those affiliates.
Recently, a coordinated effort in Colorado led to the alteration of a tax on online sales to exempt affiliates. WebmasterRadio.FM will watch the California situation and inform readers and listeners on how they can participate in opposing California’s latest efforts to impose such a tax.