Affiliate Programs and State Taxation: Amazon.com vs North Carolina

A new bill has been proposed in North Carolina that could affect many online sites running affiliate programs, pitting the state against Amazon.com and other online commerce sites that run such programs. The bill would require sites with any affiliate presence in the state to collect and pay state sales tax on applicable sales delivered in that state.

It comes as no surprise here, with deficits reaching the billions at the state levels, that efforts to audit returns of all kinds, and clamp down on any so-called loopholes, will intensify at the state, local and federal levels. Nothing says cash-flow like back-taxes, penalties, fines and new revenue sources applied via court decisions and legislative mandates.

Anyway, current law states that any company with a physical presence in the state must pay state sales taxes on sales to people within that state. New York, in 2008, passed a law similar to what North Carolina is trying to enact currently - a law that says that any Affiliate of the company located within a state can be considered a physical presence, even if the physical presence is simply a blogger's home or business serving up Amazon ads (or insert your favorite web commerce site here).

To me, this seems ludicrous. For anyone understanding the nature of most affiliates, they derive a small payment for referring people to the main sites when those people buy from the site. There are many benefits to the programs, as it helps with viral messaging and promotion, improves linking and thus SEO factors, and provides both a nominal increase in sales to the main site and revenues to the supporting promoter.

On the negative side, however, are fairly decent support costs, accounting costs, and the like. If this case is won in favor of the State of North Carolina, it would mean a significant rise in these costs for all sites trying to run Affiliate programs within the state, especially in accounting and reporting costs, as they would be required to collect and file tax returns and checks in the state, soon to be all states if this is allowed to continue. To those of us who have filed such returns, they are time consuming and banal. Not only would costs rise to all consumers in the state due to the taxes added on to each order, but the costs of administering the reports and auditing them would also rise.

The small, fractional amount of revenue and other positive factors that an Affiliate campaign can bring to a site would very soon be overshadowed and overwhelmed by the costs of administering the program; as a result, all players would loose. No longer would affiliate programs be run in the site (since the costs to administer them would be too high), so the state would loose critical personal income of it's citizens from the program, and they would still loose the sales tax that they are hoping to get (though I'm sure they'll back-tax some of it). Even if the programs do continue, Amazon claims that the higher costs with the taxes will make it uncompetitive with other sites, and overall sales will suffer, meaning lower tax revenues on the Federal level (not to mention North Carolina citizens would have to pay more for the products).

It is no wonder Amazon is threatening to pull its Affiliate program from North Carolina. It isn't worth the cost; and for smaller sites who want to run such programs, a bill like this would be a death knell. More effort needs to be made for win-win, rather than lose-lose, especially for the smaller sites who need all the help they can get in this day and age. We can only hope that legislatures across the country get the message - the prize may look big and juicy, but at what cost do they eat the apple?

Source: Why Does North Carolina Hate Amazon?