Friday, July 3, 2009

Amazon Associates Cut Off in North Carolina, Hawaii, Rhode Island and Other States: Why This is Bad for the Economy

Recently, states such as New York, North Carolina, Hawaii, Rhode Island, California, and others have introduced tax law legislation that would cause large retailers such as and to charge sales tax on interstate sales made from Associates' website links. (The "Associates" program is so-named to distinguish Associates from Amazon's official affiliates, but is colloquially referred to by publishers as an affiliate program.) In reaction, Amazon and Overstock have been closing their Associates programs in the states where the bills are likely to pass (though today there's word that Overstock reversed the California and Hawaii decision) opting to orphan their Associates in those states rather than succumb to paying the tax.

Popular opinion on these changes has been divided.
Many affiliate marketers resent the states for pushing Amazon and other retailers into making this move. "It's just another example of the government trying to get their piece of the pie!" they say.

Other Associates resent Amazon, Overstock and the big retailers for "eating their young" (i.e., affiliates) to wield a stick and prove a point. "Amazon doesn't care about us and will faze out their Associates program altogether if this keeps up!"

Meanwhile, Amazon and their ilk argue that the states' bills are unconstitutional, and that their own move to increase their leverage is one of principle. Some affiliates speculate that it's more a matter of finance and the bottom line for the retailers, and that isn't making enough money off of affiliates to justify the increase in prices if the sales tax goes through, especially in a constricting economy.

Still others are pro-government, saying that the change to taxing interstate retail commerce was always in the works--that it's been waived only so Internet commercial entities have time to grow, and now it's time to start it up.

I'm a maverick, I guess. I have a different point of view. All of these people are sort of right, but they're wrong in one essential way. Let me see if I can explain.

Matt Anderson, speaking for New York's Division of the Budget, has said:
"We believe we have to keep the tax code in line with technology, and that online retailers shouldn't have an unfair competitive advantage over off-line businesses."
To reword this, he's saying that Internet retailers like and are competing with bricks-and-mortar retailers, and they have an unfair advantage in not having to collect interstate sales tax. This measure is supposed to restore a fair playing ground to the field.
Why is this reasoning flawed? What I'm going to say is radical, but give it a chance for a moment. Internet companies and business entities are not competing with off-line businesses. They are, to a great extent, replacing them.

This recession or depression or whatever you call it? It's not a blip. It's a sign that we're changing to a new economic model. Not just growing the economy, but changing it, as thoroughly as the economy was changed with the Industrial Revolution over a century ago (and, um, you may recall a certain Great Depression happening then...?) When the change is all settled out, our society, our culture, our economy will look very different. You'll be surprised at how different it looks. (And no, we're not even close to there now. Barely anything has changed so far.)

So here's how this relates. Internet retail businesses like eBay and Amazon, not to mention manufacturers who are starting to sell their own products, affiliate marketers and any of the zillion new retail models popping up online, are in many cases--not all, but many--supplanting traditional retail businesses like department stores, flea markets and bookstores. Business on the Internet is different from business off-line in crucial ways. Its breadth and scope is bigger and crosses national boundaries. Local laws no longer suffice. A perfect example is the Google organization.

The Google (TM) organization's reach is world-wide, yet the laws only cover the company as if it were an itty bitty outfit in California. The Google AdSense (TM) network of publishers and AdWords network of advertisers reaches to every corner of the globe. Yet if a publisher would ever want to take the company to small claims court, he or she would have to travel to the region in California where such civil action must take place.The company  is treated, in other words, as a locally-rooted business. Simply put, the world has never seen the kind of scope that the online universe offers to businesses, and so doesn't have laws in place that accommodate this sort of commerce.
When local laws and traditions, which evolved in the "old" economic model, try to adjust to the budding new economic model and encompass it, they have to somehow squeeze new-model entities--such as Internet affiliates - into old model definitions. Doing so, though, means being unfair to every party involved. The only way to be fair to all - affiliates and retailers alike - is to make new laws - no, not just laws - new economic, legislative, and even political constructs that accommodate the new model.

For example, let's look at what affiliates are. Affiliate marketers write content on their websites and other Internet properties to advertise products and earn money off of actual sales made through their links. So affiliate marketers are, all rolled into one: journalists, researchers, publishers, advertisers, sales people, toastmasters, just-your-average-joes, PR people...the list could go on. They don't fall into a neat slot. Do they "make" a sale? No. But they don't just advertise either. Through any of several strategic models, they match the buyer to the product.

How do the existing laws cover this entity? By limiting their definitions. The states say, "Affiliates are sales people and their websites or Web pages are local stores." and the retailers essentially say, "Affiliate links are not retail entities, and you states are making the law up to suit yourselves."

But what's really happening is that the old laws don't cover affiliates. They can't, because affiliate marketers are a new animal. They might fall into various slots, but none fit perfectly. This is one reason affiliate marketing is considered one of the slimiest new Internet professions. It's a new type of retail model and nobody knows what to think of it--are these people underhanded? Sneaky? Scammers? Or legit sales people? Or are they sales people at all, but simply people who profit from their opinions, like op/ed writers?

I am sad to say that even though I am an affiliate marketer myself, and an Amazon Associate, I lean more toward supporting's move than the states'. Not because I don't want affiliate sales to be taxed. Indeed, I'm a maverick here, too. I want all internet sales to be taxed, because there's nothing that will lend legitimacy to the new online business model better than the government's taxing of it.

Now as to which government I'm talking about - local, state, national, international - that's yet to be seen. I have no idea what the government will look like in twenty, fifty, a hundred years. I do know that political structures will change.

So in sum, new tax law is, indeed, needed. Interstate sales do need to be taxed. But not like this. Because this is an attempt by the states not to restore balance in a normal, stable competitive marketplace, but to constrict the growing new model of commerce in favor of preserving the old model of commerce...and that's a losing battle. Honorable, perhaps, but it will just slow down the transition and make it all the more painful.

I sincerely hope the states stop these taxation measures and look to the bigger picture to find a more effective model of taxation that will accommodate what's really happening in the marketplace. That said, I don't think that the squeeze plays by and are helping at all. In fact, they keep the old game going. I'd rather instead we invent a new game.

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Anonymous said...

Don't we pay enough taxes as it is? the reason the brick and mortar stores are closing is because taxes are killing them, on top of everything else it takes to run a business. Taxes being on top of the list are high,insurance, vendors etc etc if we start doing the same to internet sales we will have the same problem.

Nerd Writer Mom said...

Respectfully, I believe you and I have different opinions/assumptions about taxes. I do think we agree that taxes to Internet businesses right now would constrict them unmercifully. I think it's just the wrong time and the wrong way to do it.

If we assume that taxes need to happen for roads and education and other benefits of modern living, then I can see no reason why eventually Internet commerce should not come under the purview of a taxation system. I just have the problem with the way it's being done by the state and with the knee-jerk reaction of the retailers.

There are people though (and I am not one) who believe all taxation is wrong. Under that assumption, then the proper course of action is to get rid of all taxes and add no new ones. Either way, whether you're pro-tax or anti-tax, what the states are doing now, and what the retailers are doing in retaliation, is not helping to support or build an economy. And I think it's because they're in the wrong paradigm. They're trying to save a failing economy, rather than build a new one.

Anonymous said...

Now see your explanation made more sense to me now. You are correct in this economy it is crazy, I am not anti-tax, just like you i dont believe it should happen right now or at least until they have taken all the information on all sides. The retailers like amazon are doing this so that if enough people complain the decision will be reverse but they know this won't stand for long. Commission junction I believe has also closed its affiliates to those states.

Nerd Writer Mom said...

I didn't know that about CJ. Are you sure? I know is now a part of Commission Junction. But I'd heard the opposite--that CJ was still serving those states. Let me know if you find a source either way.

It seems as if right now, the affiliate programs are not unified in this effort to slow legislation from pushing through. If they become unified, this could get very bad.