Internet Retailers
2:15 pm
Mon June 6, 2011

"Amazon Tax" Divides Small Businesses

Two types of small businesses in Connecticut have been pitted against one another in recent months by a controversial piece of legislation. The measure, which goes into effect July 1st, attempts to force Internet retailers to levy sales tax in the state for the first time.

As WNPR’s Harriet Jones reports, some are calling it the “Amazon tax.”

This is North Cove Outfitters in Old Saybrook, where Iain McGowan is helping a customer.

“People should visit retailers because they have product knowledge and expertise and customer service.”

Co-owner of North Cove Outfitters Norm Cavallaro.

“Somebody walks in and you want to talk about telescopes, that’s a person who does that as an avocation as well as their vocation. If you want to talk about fly fishing, you’re talking to people who go fly fishing when they leave work, you want to talk about paddling, same thing.”

Service, says Cavallaro, you don’t get on the Internet. Twenty-three years ago, when the store was first founded, Cavallaro says he used to be irritated by people who walked in with another company’s mail order catalogue in their hand. But the rise of the Internet is on a whole different scale.

“People are now walking in places and they can see a product and just put their phone next to it and find out who sells it cheaper.”

Tim Phelan of the Connecticut Retail Merchant’s Association says because customers don’t pay sales tax on Internet purchases, it’s not a level playing field.

“How discouraging is that? You go to your store every day, you’re working hard, you’re trying to stay competitive. You’re trying to fulfill a dream that you’ve had to create your own store, your own business, and there’s somebody else out there that has this sort of 6.35 percent head start on you on price.”

The state of Connecticut in these fiscally challenged times has also noticed that inequity, calculating that it is missing out on some nine million dollars in revenue each year by not collecting sales tax on online purchases. Strictly speaking, if you buy something on the Internet you’re supposed to calculate and pay a use tax on your annual return, but only one percent of Connecticut residents comply. Hence the new law that’s been dubbed the Amazon tax, which makes retailers responsible. But there’s a whole other sector of small businesses in Connecticut who say they’ll be hit hard by the new legislation.

“So we run websites that advertise different partnerships and relationship with companies like Overstock and Amazon.”

Tom Caporaso employs 25 people at Clarus Marketing in Middletown. His flagship website is freeshipping.com, and he makes money from customers shopping on the Internet.

“They would visit freeshipping.com first, they’d see an offer from Overstock on one of the advertisements on our site, go over to Overstock, make a purchase and ultimately we would make revenue on that purchase.”

That’s what’s called an affiliate relationship, and it’s what has made the Amazon tax law possible. Because big out-of-state Internet retailers have affiliate websites in Connecticut where they place ads, the state can argue they have a physical presence, or nexus, in the state, and should collect sales tax. Caporaso says that’s fine in theory.

“At the end of the day, should Connecticut residents go to Amazon and pay a sales tax – yeah, I have no issue with that. Just the way they’re going about it with the affiliates in the middle is just not the solution.”

In practice what is happening is that Internet retailers are just severing their affiliate relationships, in order to avoid the tax. More than 30 web retailers, including the giant Overstock.com have now withdrawn advertising from their Connecticut affiliates. That means they can still sell to state residents without the need to collect sales tax, even after passage of the new law.

“In many ways it’s not leveling the playing field, it’s hurting a growing new media technology company like ours, and at the end of the day the small mom and pop booksellers are not getting any benefits either.”

There are three thousand affiliates in Connecticut, according to their national trade association, the Performance Marketing Association. The association says in 2010, they earned 236 million dollars in revenue. While most of them are lone bloggers, about 25 percent of affiliates make their living solely from their marketing activities, and around 5 percent of them, like Clarus, are employer companies. The Association’s Rebecca Madigan says in the six states that have so far passed Amazon taxes, the effect on affiliates has been devastating.

“So in fact, the state ends up losing money. You have these website owners that lose 25 to 35 percent of their income. The state not only loses that in income tax revenue, they potentially lose a lot more because many of these affiliate marketers just move out of state.”

“I think it will be difficult”

State Representative Pat Widlitz is co-chair of the finance committee and key supporter of the bill, but even she acknowledges the state may not make money.

“Unless we have a nexus, which is through the affiliates, it will be difficult to collect those taxes.”

But she says in the absence of any national initiative, Connecticut had to step up.

“If the federal government doesn’t initiate action, the states have a problem. It’s our revenue stream. So we have to band together and push this issue, bring it to the forefront and really pressure the federal government to take action.”

Senator Dick Durbin has introduced legislation at the national level to allow all states to levy sales tax on Internet purchases regardless of physical presence, but in the Republican controlled House, it’s given little chance of passing. Meanwhile Amazon itself has filed a lawsuit against New York’s Internet sales tax law, while the affiliates’ trade organization is suing the state of Illinois on the same issue, meaning uncertainty over the tax may go on for years.

For WNPR, I'm Harriet Jones