If you were an Amazon affiliate in California, North Carolina, Hawaii and Rhode Island – you already know that Amazon has canceled affiliate programs in those states to avoid dealing with sales tax. Other affiliate programs are following Amazon’s lead. And this follows last year’s cancellation of most New York state affiliate programs.
Back in the Clinton years, the Congress passed a moratorium on internet taxes, to give new online ventures a chance to grow. It worked.
But states watched their sales tax revenues shrink as online sales took a bigger and bigger bite out of traditional retail sales. They are now searching for ways to recapture that revenue, especially as the sour economy shrinks revenue in general.
The problem is complex – more than just an “I hate taxes!” kneejerk reaction is required.
The sales tax issue can get very complicated depending on which state legislature’s latest salvo you are talking about.
Last year, Commission Junction and a number of other affiliate progams dropped all their New York State affiliates (Amazon is suing NY right now), because NY passed a law saying that having an affiliate in NY was the same as having a physical presence in NY.
To collect sales tax, a business must have a physical location in that state. Any business with an affiliate in NY was suddenly a NY based business (with some dollar amount restrictions).
Amazon’s problem isn’t whether affiliate sales were taxed – Amazon doesn’t collect taxes for third party sellers, even in Washington state. The real problem was that all of Amazon’s own sales in New York became taxable sales.
States like New York have hundreds of tax jurisdictions. Big, populous states have state sales tax, city sales tax, county sales tax and added excise taxes for football stadiums and rapid transit and who knows what all. And the taxes change all the time.
So it isn’t just a matter of collecting one more tax – it is a huge, complex undertaking to tax each purchase based on the buyer’s address anywhere in the USA. You have to know when the voters of Back End Of Nowhere, Anystate, USA pass a .001% sales tax increase to build a new library – whether you’ve yet sold anything there or not.
As anyone who had to deal with the switch to buyer-based sales tax change in Washington state this year will tell you, location based tax collection is a bookkeeping nightmare for internet sellers, even in a small state. Multiply the problem by every single, tiny tax jurisdiction in the US – and the scope of the looming problem becomes clearer.
WHY THIS MATTERS EVEN IF YOU AREN’T AN AFFILIATE
Each state legislature is trying to deal with this piecemeal right now, and it is a horror show. Whatever your preferred solution (and we have to admit, internet sales are a tax drain on local economies – whether we support sales tax or not, someone has to pay for schools and roads and sewer systems), the solution needs to be national rather than local if it isn’t going to strangle business entirely.
If you are an internet seller – even if you are only a small affiliate of Amazon, this is your problem as well as a problem for big retailers.
Here’s a peak at what independent sellers may soon encounter. In Western Washington, the population is concentrated in King County (Seattle) with smaller cities and towns going south into Pierce County (Tacoma) and north into Snohomish County (Everett). All three counties have different tax rates. And different cities and towns within those counties also have different tax rates.
If you have a physical business, you know the tax rate for your location and that one rate is all you need to know. But if you have an internet business, you need to know the tax rate where your customer lives, not where you ship from.
The town of Bothell straddles the King/Snohomish county lines. Some Bothell addresses are taxed at a higher King County rate. Others are taxed at a lower Snohomish County rate. Zip codes won’t tell you which county tax to apply – because the county line actually goes right down the middle of some streets. You need to know which side of the street your customer lives on!
This drives Washington state businesses wild. But at least we know the problem exists. Now imagine you are an internet seller in a small town in Indiana who has never heard of Snohomish County, let alone the city of Bothell.
How are you going to find the correct tax rate? Will your sales tax database have to be accurate down to the level of individual street addresses?
Internet sellers need to get on top of this issue, somehow, soon.