Federalism, Taxes and the Internet Economy – or – Why We’re Moving to Whiting, Indiana

Yesterday I filed paperwork to terminate our license to do business in Illinois and shortly we will be packing up our Chicago offices and moving to new ones in Whiting, IN, 15 miles away.  We aren’t moving because of lackluster business or a lack of enthusiasm about the region.  Nope, quite the opposite.  Business is great in Illinois; and we have a phenomenal team stationed there. We’re moving because on March 10th, Governor Quinn signed the “Affiliate Nexus Tax,” or HB 3659 a law with the stated aim of collecting additional sales tax for the state.  But, simply put — it doesn’t.  It does however, force jobs out of state and smaller businesses to shut down entirely.

A wee bit of background – States can only require merchants to collect sales tax from buyers in their state when the merchant has a physical presence in that state. You may have noticed that if you live in California, Amazon does not collect sales tax from you. Many states are upset to miss tax revenue on these purchases and have been looking for ways to collect.

Many Internet merchants run performance marketing programs. People can promote the products those businesses sell and if they end up generating business, they are paid a fee. These promoters have historically been called “affiliates” and the practice as a whole termed “affiliate marketing”. In aggregate this is big business – all the major merchants like Amazon, eBay, Wal-Mart and Best Buy have these programs, often administered by third party “networks” and billions of dollars are paid out this way every year. VigLink‘s business is in assisting content publishers to become affiliates and help them get paid.

Lately, a number of states have floated laws that deem affiliate marketers and eCommerce merchants a nexus.  By trying to consider affiliates “employees” of a merchant (with clear evidence to the contrary), state governments are asserting that online merchants have a physical presence in their state. Such a presence would permit states to require merchants to collect sales tax. The proposals are not exclusive to affiliates – various versions contemplate the presence of subsidiaries or servers or even the use of vendors in a state as establishing a presence. Any business should be concerned about the risk that a distant state may attempt to impose a tax burden on them using some tenuous assertion of “presence.”

Merchants have reacted by filing suit in various states, pointing out the flaws in these laws but in a move best described as “better safe than sorry” they’ve also reacted by terminating relationships with affiliates in the affected states. VigLink is such an affiliate and as of March 10th, Illinois is an affected state. Rather than lose some of our most lucrative relationships, we’re closing our Illinois offices and moving to Indiana which is unaffected and where the governor has pledged not to pass such a law.

The net effect of course is a lesson in unintended consequences – the states haven’t gained a single cent in additional tax revenue, but they’ve lost the jobs (and associated tax revenue) that need to move out of state or that go away entirely. It’s estimated that in Illinois there are roughly 9,000 affiliates affected.

We’re not not opposed to states collecting taxes they are due and certainly there’s discussion to be had about whether local merchants are at a price disadvantage, but these laws have proven an entirely ineffective way to address the problem. Senator Durbin recently introduced a bill to address this question at the Federal level which seems like a more appropriate place for the debate to be had. At least it will stop the inter-state scrambling.

So quick recap: no additional revenue + immediate job loss = winning piece of legislation? We’re left a bit confused.  Illinois (Chicago specifically) has been striving to establish itself as a technology hub for years. They boast Groupon as having headquartered there and are actively seeking others to join their ranks.  But this move hardly instills confidence.

In the meantime, VigLink is packing up and getting to know our new home in Indiana. While it may be too late to remedy the situation in Illinois we feel like it’s worth discussing what happened. Are technology companies important to the success of our economy and community? The Illinois state government has answered that question with an unequivocal no.

VigLink is headquartered in California, a state as cash-strapped and as dependent on technology jobs as any. Will California fall into the same trap? Similar bills have been proposed and are currently being considered by the approprations committee.  Neither has become law yet.

Let’s help California get this one right. Reno is an awfully long drive.

Oliver Roup
Founder / CEO, VigLink
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What you can do:

  • Become an advocate with the Performance Marketing Association.
  • Write your state senator.
  • Spread the word

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ABOUT VIGLINK

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