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Reason Foundation

More Casualties of Internet Tax Overreach

Steven Titch
July 1, 2009, 12:29pm

Overstock.com is ending its marketing affiliate program in four states that have passed dubious legislation declaring online affiliates the equivalent of a brick-and-mortar shops, thereby making Overstock.com and other online retailers subject to sales taxes. New York State attempted this last year but reversed course after Overstock threatened to end its affiliate program in the Empire State passed a similar law last year and Overstock dropped 3400 affiliates in the Empire State.

The Wall Street Journal reports:

Overstock.com Inc. informed its marketing affiliates in California, Hawaii, North Carolina and Rhode Island that it is ending its business with them to avoid collecting sales tax.

Lawmakers in the states have passed or are preparing to pass legislation that would require companies to collect sales tax if they have marketing affiliates in the state. Affiliate marketers run blogs or Web sites and get a sales commission by featuring links to outside e-commerce sites.

Rival Amazon.com Inc. has taken similar steps in the past few days, ending ties with affiliates in three of the same states and warning about California.

"It's painful to have to terminate these relationships with affiliates, simply because they live in states where counterproductive (and likely unconstitutional) laws are being passed," Overstock Chairman and Chief Executive Patrick Byrne said. "However, politicians have to remember that a tax is a price that government charges for a service, and when they raise their prices, we're going to buy less of their services."

Defining online affiliates as a physical "nexus" is a stretch to begin with. Affiliates are not merchants. In many cases they are Mom-and-Pop website set-ups that do not sell products online but earn a commission based on sales they generate through “clickthroughs” on advertising links they host. At the same time, such sales taxes, which rely solely on semantics to reach across state lines, arguably violate the Commerce Clause in the U.S. Constitution. In the meantime, the habit of many state governments have of turning to telecom and the Internet to feed their tax-and-spend ways continues to kill the very e-commerce development that has been boosting household incomes.



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