The “Amazon Tax” Explained
Thursday, June 27th, 2013
Recently there has been a lot of talk in performance marketing circles about “Amazon Tax.” Unfortunately, there has been very little clarification of what this really is and what it means.
As a hot topic in the performance marketing industry, we wanted to bring you the latest information and explain where and how this all started.
Who better to explain than an expert right in the thick of it….
Rebecca Madigan, Executive Director of the Performance Marketing Association, explains more.
Relentless Attack on Performance Marketing
The performance marketing industry is facing some unique legislative challenges, which has, in fact, wiped out 76,000 affiliate marketers, or about one-third of all publishers. And it isn’t because these small business owners did anything wrong. It’s because they were caught in the middle of a 3-way battle between Internet retailers, who have been largely immune to having to add sales tax onto online purchases, and brick-and-mortar retailers who feel the sting of that competitive pricing disadvantage because they have to add sales tax, and from 46 states who crave tax dollars generated by all those e-commerce transactions. This issue is commonly called the ‘Amazon Tax’, which exposes the political intentions of retail giants like Walmart to get their online arch-nemesis to have to collect sales tax like they do.
A Really Brief Explanation of Sales Tax Law
In an attempt to make sense of all this (which is ridiculous actually, I’ve been in the middle of this for nearly 5 years and very little about it makes any sense), let me give the briefest of explanations about how our country’s sales tax policy is structured. We have 50 states, who continually strive to be as independent as possible, wrapped up under the Federal Government umbrella, which oversees things that are common to all states or are in the best interests of the country as a whole (this is an entirely idealistic and naïve statement).
Each state controls how it raises money to fund state responsibilities, like schools, police forces and public works. Of the 50 states, most use a combination of taxing its citizens’ income and taxing purchases made in the state. In fact, 46 states have sales taxes, which can vary wildly in the percentage rates of the purchase price they charge (ranging from 2% to over 10%), and on different kinds of items (in some states, clothing or text books are tax-exempt, in other states, it’s types of foods). The rate of sales tax is determined by where the purchaser resides.
Retailers must collect sales tax on items sold within the state but only if the retailer has a physical presence in the state (called ‘nexus’), like a storefront, a warehouse or a sales force. States can’t require retailers in other states to collect sales tax from purchasers in their own states. Here’s where it starts to get sticky. Most Internet retailers have physical presence in only 1 state or a few states; as a matter of fact, initially Amazon deliberately limited its expansion to only a few states so they wouldn’t have to collect sales tax from most US customers.
This irritates brick and mortar retailers, who have an unfair pricing disadvantage because they have to charge sales tax, making total purchase prices up to 10% higher. And it frustrates states, which are desperate for the potential revenue if sales tax was collected on Internet purchases. In 2008 the state of New York passed the first “Amazon Tax” law, which unintentionally hit the performance marketing industry directly, and here’s how: This law said that if out-of-state retailers are working with affiliate marketers in New York, that’s the same as having stores or sales people, so those out-of-state retailers must now start collecting sales tax on purchases made by New York residents.
First of all, it is completely illogical, because we all know that affiliate marketers are simply running ads; they are nothing like a sales force or storefront for their retailer partners, because affiliate marketers don’t sell anything, they don’t collect money from customers nor deliver any product – they don’t even know who clicks on their ads! Second of all, the US Constitution, which in part prevents states from overreaching their jurisdictions, along with supporting Supreme Court cases say ‘advertising does not constitute physical presence or nexus.’
Third of all, this law was a complete failure. It caused out-of-state retailers to simply terminate their affiliate agreements with New York affiliates, to avoid having to collect sales tax. By our estimate, about 1,000 out-of-state retailers cut off 15,000 New York-based affiliates, which devastated the incomes of all those affiliate marketers. The law didn’t force Internet retailers to collect sales tax as intended; the state never saw increased sales tax revenue. And the state lost revenue from income tax, because we estimate about 1/3 of New York affiliates were forced to move to other states, about 1/3 downsized and caused lay-offs, and about 1/3 went out of business altogether.
Despite this failure, 10 other states have enacted similar laws in the past 5 years since the New York law went into effect. The Performance Marketing Association has waged over 70 grassroots campaigns in that time; so while we have had statistical success, there are still 76,000 affiliate businesses that have experienced financial devastation. You might ask why other states pass or attempt these futile laws that only end up killing small business segments in their states. A few years ago, states really thought this was a way to pressure Internet retailers to collect sales tax. In the past couple of years it became clear this is a political move to pressure the federal government to reform sales tax rules for the whole country.
Fortunately, there is now a bill before the US House of Representatives that will do just that. Known as the Marketplace Fairness Act, it reforms sales tax laws for the states by removing that physical presence requirement. The bottom line means that all retailers, whether online or offline, will have to collect sales tax for all states. This means retailers can no longer avoid this obligation by terminating affiliates – so those 76,000 affiliate marketers can get back in business.
The PMA supports the Marketplace Fairness Act, as do most people in the industry. It levels the playing field for all retailers. It allows states to collect much needed revenue. And it restores affiliate marketing relationships in all states. We think it has a good chance of passing this year; it has succeeded in two of the three hurdles (the US Senate passed it and President Obama announced his support). Only the House is left to pass it, and it is larger and more politically volatile, so it won’t be easy. But there are prominent supporters in both parties; we just need to avoid the political stalemates we saw last year. Hah, no problem!
The Board of Directors for the PMA continues to believe resolving the ‘Amazon Tax’ issue is the top objective of the PMA because it is the largest threat to our industry.
In the spring of 2012, the PMA also won its lawsuit against the State of Illinois; the judge ruled the ‘Amazon tax’ law was unconstitutional. The state appealed and just a couple of weeks ago we had oral arguments presented in front of the Illinois Supreme Court. I think we did a pretty darn good job, but we aren’t sure when the court will rule. If you’d like to see our industry well represented, you can watch the Supreme Court proceedings here (3rd down on the list, it lasts less than an hour):
This issue won’t go away on its own, and as a matter of fact, three states just passed or are about to pass ‘Amazon tax’ laws (Maine, Minnesota and Missouri), which will wipe out another 10,000 affiliates in those states. Walmart and its big box brethren won’t give up until the MFA is passed, and we just don’t know when that will happen. We believe there’s a good shot in 2013, but with politics, there is massive uncertainty. And until the MFA passes, targeting affiliate marketers with ridiculous ‘Amazon tax’ bills is their only remaining tactic. Destroying small online businesses is their favorite way to pressure Congress to act.
Want to Join the Fight?
The PMA is a small organization, representing thousands of small companies in our industry. The more members we have, the bigger our voice and we will have more resources to fend off these threats.
It’s easy, it’s not expensive, and by working together, we can not only defend our nascent industry, but we can help it grow! More information can be found at thepma.org.
Rebecca Madigan is executive director of the Performance Marketing Association. She is not an attorney or a tax professional, but she has been a prominent figure in the sales tax debate in the US, and has garnered a reputation as one of the country’s leading experts in Internet Sales Tax legislation. The Performance Marketing Association (PMA), headquartered in Camarillo, Calif., is a not-for-profit trade association founded in 2008 to connect, inform and advocate on behalf of performance marketing, a multi-billion-dollar marketing channel, which comprises more than 200,000 businesses and individuals. Continued growth of the performance marketing space is expected as advertisers, facing small budgets and big expectations, increasingly look to performance-based marketing initiatives to expand their business. Additional information is available at: http://www.thepma.org.