When news of the new "Amazon Tax" spread, most New Yorkers
probably thought it just meant they'd have to start paying a little more when
they ordered online merchandise. But the law, passed in Albany last month, is
likely to have a far greater effect on small businesses than it is on consumers.
doesn't charge or collect tax for purchases made by its many New Yorkers
customers, but will have to under the new rules - requires out-of-state online
retailers with $10,000 or more in sales to New Yorkers to start collecting New
York sales tax. The law is meant to increase tax revenues and to even the
playing field for New York-based online retailers, who already collect the tax.
The more likely result, though, is losses for New York's small online
businesses that currently earn money from referrals through "affiliate
programs," and for others in the state as well.
Affiliate programs are a combination of advertising and marketing that is
unique to the Internet. In an affiliate program, an independent Web site links
to an online store or a particular product, using a specially coded link. If a
user clicks on the link and purchases an item, the site making the referral
gets a commission. Because of the simplicity of these programs, they are most
often used by bloggers, small Web sites and even schools to generate modest
amounts of additional income from retailing without having to actually operate
a store or fulfill orders. Unlike resellers or sales reps, online affiliates
don't usually provide any service or support to the customer, other than
getting them to the product. Retailers benefit by paying only for advertising
that actually leads to sales.
Traditionally, mail-order and online retailers have collected sales tax for
shipments into each state where they had some kind of presence, a concept
known as "nexus." Until now, nexus has meant having physical offices,
employees, service providers or inventory located in New York. When Maine's
L.L. Bean opened its retail store in Albany, for example, it had to start
charging sales tax for mail-order purchases shipped into New York State. The
new law expands nexus to include out-of-state online retailers with New
York-based affiliate program members.
The whole justification for tax based on nexus is that when a business
benefits from a state's laws - like with contract law and police and fire
protection of store locations - it should pay for the privilege. Affiliate
relationships, though, are almost always established through automated systems,
and the merchant may not even care with which sites it is affiliating. What's
more, the affiliate agreement generally provides for the retailer's state law
to control the terms. The physical location of the affiliate is essentially
Critics of the new law say it is unworkable because tracking multiple sales
tax rates is difficult - particularly for smaller retailers - while supporters
counter that software tools are making this easier. But the reality is that
Amazon and other merchants with affiliate programs won't bother adding the
additional capability to collect New York tax; instead, they'll take the far
easier step of blocking any New York-based site from their affiliate programs.
The result will be a tremendous loss of income for the numerous small New York
businesses now participating in affiliate programs.
The law will also hurt companies like New York City-based LinkShare, which
generates revenue by managing others' affiliate programs. And it may make it
harder for New York-based online retailers to find their own affiliates.
If New York wants a larger share of online sales tax revenues, it should
focus on making the state more attractive for online retailers to set up shop
here, and improve enforcement of existing tax laws. Instead, the Amazon Tax
will hurt New York's small online businesses and entrepreneurs, and ultimately
may lower overall tax revenues, while strengthening New York's reputation as
being unfriendly to small businesses. Before it goes into full effect and the
damage is done, the governor and legislature should delete the Amazon Tax.