Online Retailers Drop More Affiliates Over Internet Taxes

Online Retailers Drop More Affiliates Over Internet Taxes
September 1, 2009

Steve Stanek

Steve Stanek (sstanek@heartland.org) is a research fellow at The Heartland Institute and managing... (read full bio)

Online retailers Amazon.com and Overstock.com recently dropped hundreds of affiliate advertisers in California, Hawaii, North Carolina, and Rhode Island because of new laws requiring Internet retailers to collect state sales taxes if they have local affiliate advertisers.

Amazon.com in June notified Hawaii, North Carolina, and Rhode Island affiliates it would end its affiliate advertising program in those states, and on July 1 Overstock.com sent similar notices to all of its affiliate advertisers in California, Hawaii, North Carolina, and Rhode Island.

“It’s awful to have to terminate these relationships with affiliates simply because they live in states where unconstitutional laws are being passed,” said Patrick Byrne, Overstock.com’s chairman and chief executive officer, in a statement. “However, politicians have to remember that a tax is a price that government charges for a service, and when they raise their prices, we’re going to buy less of their services.”

Overstock.com spokesperson Roger Johnson said 327 advertising affiliates were dropped—279 in California, four in Hawaii, 37 in North Carolina, and seven in Rhode Island. He declined to say how much sales revenue the affiliate advertisers generated last year for the company.

‘Ad Business Will Go Dark’

The firm’s president, Jonathan Johnson, added, “Internet advertising is a tidy little business that can be done by just about anyone, anywhere on the globe, and when states unwisely and unconstitutionally pass these laws, their local Internet ad business will quickly go dark, and that ad business will simply migrate to states more friendly to internet commerce. In the end, the only thing to be accomplished by these laws will be to put more local citizens out of work—exactly the wrong choice in a down economy.”

At Amazon.com, spokesperson Patty Smith told the Associated Press, “We felt that we had to take this step, and it’s unfortunate. But we feel like we have little choice.”

The moves by Amazon and Overstock continue a longstanding legal fight. Last year the two companies filed separate lawsuits against New York State and canceled contracts with several thousand New York-based advertising affiliates when New York enacted the first law to force online retailers to collect state taxes on sales originating with advertising affiliates. Both suits are pending.

Fight Over ‘Physical Presence’

The dispute centers on a U.S. Supreme Court ruling that a company must have a “physical presence” in a state before it can be forced to collect sales tax. The laws in question seek to designate local, independent Internet advertisers as giving the online retailers a physical presence that obligates them to collect the tax.

Byrne said, “Outside of Utah, we don’t have the type of operations that storefront and other retailers have, and we don’t impose the same burdens on local state infrastructure that locally based business do. Therefore, imposing similar tax collection obligations on us in those states is patently unfair.”


Steve Stanek (sstanek@heartland.org) is a research fellow at The Heartland Institute and managing editor of Budget & Tax News.

Steve Stanek

Steve Stanek (sstanek@heartland.org) is a research fellow at The Heartland Institute and managing... (read full bio)