In case you’ve missed it, a new law went into effect yesterday in New York State that has been dubbed the “Amazon tax“. The law requires online retailers who use affiliate marketing systems to collect and pay New York sales tax on purchases sold that were referred from affiliates based in New York if those sales total more than $10,000 per year. (Previously, as most shoppers know, online merchants have only been required to collect sales tax from a state that they have a physical presence in, such as a store.)
This is not technically a tax hike for New York, since New Yorkers are required to pay taxes themselves via their tax returns on these purchases already. The problem is in the eyes of the state that many consumers ignore this requirement and so the state wants to go after this revenue stream at its source – the store – since they are in a budget crunch.
Obviously this law is aimed at several big retailers, especially Amazon.com, who use affiliate marketing and have a huge online presence but no physical presence in New York. Amazon has already filed suit to invalidate the law, calling it unconstitutional. Overstock.com has also filed suit against the State of New York for the same reasons, after notifying their New York-based affiliates that it was removing them from the program because of the new law.
So what does this law mean for the scrapbook industry? A lot of specialty shopping takes place online these days, especially in the scrapbook industry. Several of the biggest online scrapbook retailers – Scrapbook.com, Two Peas In A Bucket, and A Cherry On Top – use affiliate marketing programs and do not have physical presences in New York state. They will now have to figure out if their particular affiliates based on New York state are referring them more than $10,000 in business annually and then decide what to do about. Their options will be to collect sales tax for every jurisdiction in the State of New York, or to discontinue allowing affiliates based in New York.
And since the State of New York doesn’t have information on the new law up on the their website, I can’t even tell you what “based in New York” means. Does this mean the affiliate’s address is in New York? Does this mean the website is hosted in New York? The state seems more interested in cashing in on the law than in explaining it to the people that it might affect.
While, the effect of this particular law will be limited to large stores that are using affiliate programs (if it stands up in court), it is potentially the first salvo in a battle over internet sales tax collection that could have great impact for online scrapbook retailers. Cash strapped states, looking to enhance their revenues, and also to enhance the competitiveness of local businesses against online retailers, are increasingly making noise about trying to force online businesses to collect sales tax for them regardless of a “physical presence” in the jurisdiction. They want their money and don’t care how they get it.
If this came to be, it would disastrous for small online retailers, such as most scrapbook retailers. Think of the paperwork and financial burden that it would be for a small business to pay registration fees, collect taxes and maintain records of them, and then file the returns for them for every jurisdiction in the country. We’re not just talking about 50 states – we’re also talking about state and county sales taxes in many places too! Online retailers could have to register licenses for, collect, track and file returns for literally thousands of different sales tax rates!
This might be a burden that a large retailer like Amazon.com would barely notice on their financial bottom line, but it could literally destroy the viability of small online niche retailers that make the internet such a useful and vibrant marketplace. We would be taxed into having to return to the days when we only had the purchasing options of what we could buy at the big retailers. And the extended fallout would also be the deaths of the small manufacturers who sold product through the small retailers.
I will be watching the litigation over this issue involving Amazon and Overstock.com with interest, and will keep Scrapbook Update’s readers up to date on the progress of it. It could be important to the very future of online retailing.