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Opinion

Shopping for retail tax revenue

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.

The Amazon Tax - so called because Seattle-based Amazon.com currently

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

irrelevant.

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.

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