Affiliates, merchants debate Internet Tax Act

Filed under News, Special Reports

Scott Kluth, president of CouponCabin, is a vocal opponent of the Internet Tax Act. Photo courtesy of CouponCabin.

By Ann Meyer

Linda Bubon, co-owner of Women and Children First bookstore in Andersonville, supports the tax as a way to level the playing field with online giants

Linda Bubon, co-owner of Women and Children First bookstore in Andersonville, supports the measure as a way to bring new revenue to the state

— The Internet Tax debate isn’t over yet, and Scott Kluth, president of CouponCabin, is among as many as 9,000 Illinois Internet affiliates hoping Gov. Pat Quinn will veto the measure that passed the Illinois General Assembly earlier this month.

Kluth said 500 to 600 Internet retailers might stop doing business with CouponCabin if House Bill 3569, known as the Internet Tax Act, becomes law. It would require out-of-state online retailers to collect a 6.25 percent state tax if they have affiliates in Illinois with $10,000 or more in annual revenue. “It’s easier for the Amazons and Overstocks of the world to say, `We’re not going to work with you (affiliates) because of this law’ than it is to charge the tax,” Kluth said. Ultimately, he said, the law would “cause lost jobs and lost revenue” for the state of Illinois.

Merchants want level playing field

Still, the measure is being supported by thousands of brick-and-mortar merchants, despite the fact that online retailers say it’s unconstitutional. “It’s only fair that these remote sellers be required to collect sales tax,” said Rob Karr, senior vice president at the Illinois Retail Merchants Association. “There’s no reason for Illinois’ merchants to be put at an unfair advantage.”

A Constitutional question

At the heart of the controversy is what defines nexus, or a physical presence in a state. It’s not a new debate, though it has been heating up with the growth of the Internet, said Jerry Cerasale, senior vice president, government affairs, for the Direct Marketing Association.

In the 1992 U.S. Supreme Court Case of Illinois-based office supply cataloger Quill Corp. vs. North Dakota, the high court decided that out-of-state merchants could be required to collect and remit sales tax for other states when they had a physical presence in those states, as defined as brick-and-mortar locations, offices, warehouses or employees, but not customers alone.

“The Supreme Court said it was a violation of the Interstate Commerce Clause for a state to require an out-of-state marketer who had no physical presence to be a tax collector for that state because of the administrative burden,” of having to comply with thousands of different tax codes, Cerasale said. The ruling did hold open the door for Congress to grant the states the authority to impose their own laws, but Congress has not yet done so, Cerasale said.

New ways of defining physical presence

In the meantime, with Internet sales growing and state budgets hurt by the economy, “States have started to look at other ways to define physical presence so they can be in compliance with the rubric,” Cerasale said.

Amazon.com and Overstock.com have no brick-and-mortar locations in Illinois currently, and calling CouponCabin an arm of the online giants is a misnomer, Kluth said. “This bill tries to draw some type of similarity between CouponCabin to a commissioned sales person who would be an employee (of Amazon) with an office and have nexus,” Kluth said.

Several other state legislatures have passed measures similar to Illinois’ Internet Tax Act, including New York, North Carolina, Rhode Island, California and Hawaii, but they don’t always stick. Former California Gov. Arnold Schwarzenegger vetoed an Internet Tax law in July 2009, as did Hawaii’s governor the same month, according to news reports.  While California has re-introduced a similar measure, Rhode Island is considering repealing its Internet law, Cerasale said, because of its negative impact on affiliates and state tax revenue. Meantime, Amazon has sued the state of New York over its law, and the case now awaits a higher court’s opinion. Cerasale said Amazon purposely continued to do business with New York affiliates so that it would have jurisdiction to fight the law in court.

Amazon: We’d have little choice but to sever ties

Reached via email, a spokeswoman for Amazon.com said the company considers the Illinois measure to be unconstitutional. “The Illinois state legislature has passed an unconstitutional tax collection scheme that, if signed by Governor Quinn, would leave Amazon.com little choice but to end our relationships with thousands of Illinois-based Associates.  Over a dozen other states have considered essentially identical legislation but have rejected these proposals largely because of the adverse impact on their states’ residents,” wrote Amazon spokeswoman Mary Osako.

Fewer commissions mean less income to tax

If Amazon and others do terminate their relationships with affiliates here, “It would cut a third of our revenue overnight,” Kluth said. FatWallet chief executive Tim Storm told the Chicago Tribune his company could lose 30 percent to 40 percent of its revenue, while Brad Wilson of BradsDeals estimated half his revenue could be in danger.

Many Illinois legislators didn’t fully examine the Internet Tax Act’s implications because the measure “was gutted and amended” at the tail end of the Congressional session, said Ed Longanecker, executive director of TechAmerica, which opposes it. “There was no time to hear from the business community on the potential impact it would have,” Longanecker said.

Bubon:  Amazon’s threat is `a disgusting tactic’

Merchants like bookseller Linda Bubon, co-owner of Women and Children First bookstore in Andersonville, say the affiliates can make up the lost revenue in other areas if Amazon and Overstock sever ties, while the Internet Tax Act would bring much needed revenue to Illinois. She said she doubts Amazon actually would abandon the Illinois affiliates because of the sales they bring. “I think Amazon is disgusting to use that tactic of we’re going to drop affiliates in Illinois,” Bubon said.

What’s more, she points to Internet retailers’ impact on her own business. Bubon’s store has lost about 20 percent of its sales volume to Amazon during the past 10 years, she said. She supports Illinois’ Internet Tax as a way to level the playing field, though she acknowledged her own website does not collect sales tax on out-of-state purchases because of the burden of keeping track of more than 9,000 state and municipal tax rates. “We’re not required to,” she said. But Amazon is large enough to handle the task, she said.

“Why should Amazon have a 9.75 percent advantage” over her business, which pays that amount in city sales tax? Bubon asked. Due to the growth of online book selling, Bubon said, “Our sales continue to erode, and the state is getting less taxes from me” as a result.

But Longanecker doubts the Internet Tax Act would amount to new revenue for the state. Further, he said,  “We’ve not seen any evidence there’s a net gain in revenue (from Internet tax laws) when you take into consideration jobs that are lost and revenue that is lessened,” Longanecker said. Affiliate advertising is a growth area, with total affiliate revenue climbing 18 percent in 2009, while overall advertising declined.

Fast-growing affiliates mean new jobs for the state, jobs that often pay higher than average because they involve technology skills, Longanecker said.

Until a tax law change is made on the federal level, the state should watch what happens elsewhere, Longanecker said. “We don’t want to be the market leader in testing out something that could have such dire consequences,” he said.

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