Ten days ago, Amazon.com announced they were shutting down their affiliate programs in Arkansas in response to a new state law, signed by Gov. Mike Beebe in April, that requires online retailers to collect sales taxes.
So who’s going to pay the price for this new law? The affiliates themselves — mostly small online operators who refer business to Amazon and other sellers through links and are paid a percentage of the sale.
Take a look at Glenn Johnson of Little Rock, who runs the Full Figure Plus blog and Full Figure Network, online businesses aimed at providing fashion information and resources for plus-sized women . (Here’s a profile of Glen from BlackEnterprise.com.)
Johnson explains that while his affiliate relationships are not his only revenue stream (he also benefits from advertising and plans to sell e-books and other products), he’ll still take a significant financial hit from losing his affiliate relationships—perhaps as much as 20 or 25 percent of his income.
“Thank goodness this is not my whole business model,” he says. “For people who it’s their entire business model, this is probably going to shut them down.”
The uncertainty surrounding which affiliates will end their Arkansas programs is the most “nerve wracking” part, Johnson says. While most of the focus has been on Amazon.com, other companies with affiliate marketing programs are rapidly pulling out of Arkansas. Overstock.com announced they were pulling out in April; Zappos.com, the shoe retailer, cut off their Arkansas affiliates on May 31. Others will likely follow.
What they say it’s about
Traditionally, consumers are responsible for paying use taxes on goods purchased out of state, but most people don’t do so. Before the era of web-based commerce, most states simply looked the other way, because the costs of enforcing the law were too high. But with the growth of online retailing, state governments fear they’re missing out on the honey pot of tax revenues that could be realized from taxing online trade.
Arkansas Sen. Jake Files, the Fort Smith Republican who sponsored the Amazon bill, emphasizes that the new law simply shifts responsibility for collecting the use tax from the customer to the business — in this case, Amazon and other entities that run affiliate marketing programs.
“It’ s not a new tax,” Files explains, noting that the use tax has been on the books for years. “People just don’t know that they’re supposed to pay this tax.” He emphasized the bill centered on the issue of “fairness”: The argument goes that since online businesses don’t have to collect sales tax, as brick-and-mortar businesses do, they enjoy an unfair advantage. That’s why Wal-Mart, Best Buy and other big retailers have been the biggest force behind lobbying for these bills.
Will the new law generate revenue for the state? I talked with an attorney at the Arkansas Dept. of Finance and Administration who said it would depend on the response of the affected online retailers.
But the experience in other states indicates that there’s little new revenue to be found (particularly when Amazon and other players simply shut down their affiliate programs in response). Rhode Island, for example, has been unable to point to an increase in sales tax collections from their 2009 Amazon law, and one Democratic legislator moved last month to repeal it.
What it’s really about
Don’t be fooled by the stated aims of this law. The Amazon tax bill isn’t really about “fairness.” It’s also not about generating revenue for the state (at least not at this stage). It’s really about creating a confusing and uneven patchwork of state policies, in the hope that Congress will step in with federal action to clarify the matter.
Federal action is the solution that the big players, like Wal-Mart and even Amazon, want. It has the feel of one of those Cold War proxy battles where superpowers are running the board while the guys on the ground take the bullets.
That’s the message to the affiliates, like Glen Johnson. After all, they’re just pawns on chessboard, and Wal-Mart and Amazon are calling the moves. These guys, they don’t have lobbyists, and they’re expendable. So screw ‘em, right?
I’m on the lookout for more Arkansas entrepreneurs who are getting the shaft under this law, and have some feelers out to some other folks. Let me know if you know of others.