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 Amazon.com and Overstock.com 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 Amazon.com 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 Amazon.com and Overstock.com 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." Amazon.com 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 Amazon.com'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 Amazon.com and Overstock.com 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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