The Bad Math of the 'Amazon Tax'

By Prescott Carlson in News on Jan 8, 2011 5:00PM

Amongst the various bills that have been pushed through during the Illinois legislature's lame duck session is the so-called "Amazon tax" which changes the rules regarding whether or not an out-of-state retailer is required to collect "use tax" of 6.25%. The tax currently is supposed to be reported and paid by the purchaser if none is collected by the seller. Despite things like "Sales Tax Amnesty," however, few tax payers go along with this rule (if they're even aware of it) and the hard-to-enforce tax goes largely uncollected.

So in the name of "leveling the playing field" with brick-and-mortar stores along with making the out-of-state retailers the enforcers of the use tax, an "affiliate nexus" was added to House Bill 3659 that expands the definition of what constitutes a business' presence within the state. Previously, an out-of-state retailer would have to have physical stores, a warehouse, or a sales office within the state to be required to collect use tax on shipments of product to Illinois, but the new bill includes "affiliates" -- online marketers that add links to their websites, driving traffic to the retailer and getting a small percentage of any subsequent sale. Affiliates range from stay-at-home moms making a few extra bucks to companies whose business model relies heavily on affiliate income. State Senate President John Cullerton claims that the new law would net $150 million in new revenue.

But will it? Amazon.com really doesn't want to collect that tax, as it takes away its competitive advantage with "tax free" sales. Fortunately for them, it's easy to skirt around the requirement -- simply sever any and all agreements with its approximately 9,000 Illinois affiliates. The company has already distributed an email stating that if the "unconstitutional tax collection scheme" is signed into law, Amazon.com will have "little choice but to end its relationships with Illinois-based [affiliates]." And Amazon.com isn't the only one -- Overstock.com has sent out a similar letter to their Illinois affiliates, and other online companies are expected to join them. Both Overstock.com and Amazon.com have followed through on their threat in other states that have enacted similar laws, such as Rhode Island and North Carolina.

What that means is that if out-of-state online retailers continue business as usual, the total increase in use tax collected will be zero. Also, those affiliate dollars earned are taxable, so the state loses out on that income tax as well, resulting in a net loss in revenue.

To make matters worse, companies like BradsDeals.com and FatWallet.com, which make most of their income from affiliate marketing, have indicated that if the bill goes through they'll be forced to leave the state, taking their money and jobs with them. Chief executive of Fat Wallet Tim Storm was quoted as saying, "The reality is that as a business owner with 52 employees, we're not going to just get shut down because of a law Illinois passes. Our customers don't care whether we're in the state of Illinois."

Amazon.com and others are expected to legally challenge the bill if it is signed into law. A spokesperson for Gov. Quinn told the Sun-Times that Quinn "will review the legislation once it arrives on his desk."

Disclosure: The author of this post makes a nominal portion of his earnings through affiliate marketing.