Posted: Sat, 23 Apr 2011 04:02 PM - 9,842 Readers
By: Barry Harrell
When James Krewson set up his Austin-based price comparison website, his goals were simple: Steer shoppers toward online deals and make a living in the process.
Not part of his plan: Getting caught in the crossfire of the state's battle with Amazon.com over sales tax collection.
But Krewson finds himself among thousands of Texans — in an industry you might never have heard of — who are worried they could be collateral damage in the fight.
When the Texas comptroller's office last year sent Amazon a bill for $269 million in uncollected sales taxes, Texas joined the national debate concerning whether online retailers can be forced to collect state sales taxes, as traditional merchants must.
The stakes for the main parties are obvious: Amazon's business model is built in part on offering products tax-free; traditional retailers say online sellers have an unfair advantage if they are not required to follow the same tax-collection rules; and the state is looking for more revenue in tight budget times.
But the fight also is affecting affiliate marketers such as Krewson.
Affiliate marketers operate coupon or deal-based sites, and sometimes blogs, that channel customers to Amazon and other online retailers. They are typically paid a commission based on resulting sales. The industry estimates there are 13,000 affiliate marketers in Texas, many with ties to Amazon.
The Texas Legislature is considering at least one bill that could use those relationships as a lever to force Amazon to collect sales tax on online transactions from Texas.
Amazon has said if that happens, it will cut ties with its Texas affiliates. That could cost many of them the bulk of their business and, they say, potentially force them to leave the state.
"We don't want to move out of Texas; we like Texas," said Krewson, who operates finderscheapers.com. "But I have to protect my family's income."
This sideline skirmish has raised a key question for lawmakers in Texas and other states: will the quest to force online retailers to collect sales tax have unintended casualties?
Affiliate marketers "are the incidental victims," said Scott Peterson, executive director of the Streamlined Sales Tax Governing Board, which lobbies for standardized sales tax collection. "But then, they were also the incidental creation of all this."
The world's largest online retailer, with more than $34 billion in sales last year, Amazon has long resisted collecting tax on its sales.
That is a sore point for traditional retailers, who say Amazon and other online sellers essentially give customers an automatic discount because they don't collect taxes. It's also an issue for a number of states, including Texas, which Comptroller Susan Combs says loses $600 million a year in uncollected tax on online sales.
With online retail sales booming — they were $155 billion in the United States last year, and Forrester Research predicts that total will reach $250 billion by 2014 — the issue isn't going to go away.
New York, Illinois, Rhode Island, North Carolina, Colorado and Arkansas, among other states, recently have enacted laws aimed at forcing online retailers to collect sales tax on transactions.
The key issue in those laws has been whether or not Amazon has a physical presence in a state.
Under a 1992 U.S. Supreme Court decision, retailers with a physical presence in a state — "nexus" in legal terms — can be required to collect sales taxes, legal experts say.
It is the debate over what constitutes physical presence that draws affiliate marketers into the scrum.
New York's law, passed in 2008, says that Amazon's relationships with affiliates who live in New York constitutes a physical presence. Amazon threatened to sever all its affiliate ties in New York if the measure passed but instead chose to challenge the law in court.
So far, the New York courts have upheld the law, and Amazon hasn't yet ended its affiliate ties and now collects sales taxes on shipments to that state.
However, smaller states, without New York's strategic importance, might see a different response from Amazon and other online retailers, experts say. This year, for example, Amazon severed ties with about 9,000 affiliates in Illinois after that state's legislature passed a bill similar to New York's.
In Texas, Amazon has operated a distribution center in Irving for several years. The comptroller's office says that constitutes physical presence, and used it as the basis for the $269 million assessment.
A bill aimed at clicks
After that assessment, Amazon announced plans to close that facility. As of last week, the center was still operating. Amazon officials haven't commented publicly about the facility, other than to say operations at the center are winding down.
Texas legislators, meanwhile, are weighing two different paths in their focus on Amazon — and one of those paths would have much more of an impact on affiliate marketers.
House Bill 1317, filed by state Rep. Elliott Naishtat, D-Austin, in part aims to use online retailers' relationships with affiliates establish physical presence, a tactic known as "click-through nexus," because it uses the click of a mouse on the marketers' websites to establish a retailing relationship with sellers such as Amazon.
Traditional merchants say Naishtat's measure would simply follow New York's lead in using all means possible to force Amazon to collect taxes.
Rebecca Madigan, executive director of the Performance Marketing Association, a trade group for affiliate marketers, said she feels "our industry is being used as a pawn."
"What became blatantly obvious this year is, the big box retailers are going after Amazon. They are simply trying to push through legislation to go after Amazon," Madigan said.
Eric Bearse, Texas spokesman for the Alliance for Main Street Fairness, an advocacy group for brick-and-mortar retailers, said it is Amazon that is treating the affiliate marketers as pawns.
"Amazon has a national strategy to dodge sales tax collection in as many states as possible, especially big states, and they trot out affiliates to lobby for their case because they know a large corporation gets no sympathy for not collecting sales taxes, like many large and small businesses have to do," Bearse said.
Affiliate marketers say that Naishtat's bill wouldn't result in any new revenue for Texas, but would still put some of them out of business.
"People lose their jobs, with affiliates either moving and taking their business with them, or staying put and filing unemployment benefits," said Alex Bugeja, president of Traffikoo.com, a Dallas-based affiliate marketing firm. "My personal expectation is, if that passes, we'd lose pretty much all of our business."
Testifying at a state House hearing last month, Steve Shaffer, CEO of Vertive LLC, the Austin company behind the offers.com deal-finding site, said his company would "lose a tremendous amount of income" if Amazon cut its ties with Texas affiliates.
A clarifying measure
However, House Bill 2403, by Rep. John Otto, R-Dayton, appears to be the Legislature's preferred course.
An early version of Otto's bill included a clause that stipulated the use of a computer server located within Texas could be used to establish nexus. A revised version removed that mention. The bill focuses instead on clarifying the physical presence aspect of the tax code to specifically include warehouses and distribution centers.
Naishtat's bill has not yet made it out of a House committee. A companion piece to Naishtat's measure, Senate Bill 1798 by Sen. Royce West, D-Dallas, was approved with some revisions by the Senate Finance Committee and sent to the full Senate. Otto's House measure, meanwhile, has been sent to the full House for a vote.
Online shoppers have hundreds or thousands of options for purchases, so even retailers as large and well-known as Amazon use affiliates to help to drive traffic to their sites.
It doesn't take a large staff or a major investment to go into the business.
"Affiliate marketers are basically ghost entities. They don't have a physical plant or presence; they are just on the Internet virtually. A consumer clicks on his or her PC and gets directed to a bunch of servers that could be located God knows where," said Venky Shankar, a professor of marketing at Texas A&M University's Mays Business School.
Industry groups estimate there are 200,000 affiliate marketers in the United States, including 13,000 in Texas. That compares with an estimated 1,500 brick-and-mortar retailers in the state — from mom-and-pop stores to Walmart — which have about 2 million employees, according to the Texas Retailers Association.
Diane Yetter, president of a Chicago-based sales tax consulting firm and founder of the Sales Tax Institute, said that, historically, affiliates "haven't had as much clout, because they are small businesses, sole proprietors. \u2026 They are not corporations, so they don't have the money to pay to for the lobbyists. It's Joe working out of his garage or the stay-at-home mom or the blogger."
Because they are often such small entities, Yetter said, it's difficult to judge affiliates' economic impact.
"It's hard to show, this is how many jobs we have; these are people that, yes, provide revenues to the state. But what about when you look at it in total jobs creation, jobs retention and all the other taxes that a traditional brick-and-mortar business has?" Yetter said. "Is there an impact? Yes. Is it significant? I don't know."
Affiliates feel pressure
Shawn Collins, an affiliate marketer and organizer of conferences for those in the industry, recently moved from New Jersey to Austin. The move was based on "the business environment, the climate, a better way of life for my family," said Collins, who operates the website www.affiliatetip.com.
With a new house and four children, relocating is not a viable option if Amazon were to end its Texas affiliate relationships, Collins said.
Affiliate marketers "understand that states need to raise taxes and funds in various ways," Collins said. "They're not looking for an unfair advantage; they just want to stay and work and provide for their families and stay in their communities."
The other side of the argument is that job losses can happen in any field. And traditional retailers say they've had to cut jobs because of revenue they have lost to untaxed online sales.
"If you have tax fairness, that creates jobs in sales for brick-and-mortar retailers," Bearse said. "Then they can expand their sales forces, whether it's virtually or in the store. They can invest more in the state, make more sales and be able to expand their online presence, maybe even through affiliate marketers."
Affiliate marketers in Texas say they are growing more confident that the Legislature is leaning toward the Otto-authored bill, that doesn't mean they are comfortable with their status. States are going to continue pushing for ways to force tax collection on online sales, and the issue could resurface at any time.
"There's no immediate clarity; nobody knows how this is going to turn out. And in my mind, there's also a problem in the future," said Bugeja of Dallas-based Traffikoo.com. "What's the institutional memory in Austin, that says we're not going to touch this again? Two years from now, will it be resurrected?"
There's also a concern that Amazon and other online retailers could decide the state is simply too risky to operate in and sever their Texas affiliate ties, anyway.
Krewson said his concern is that "if enough states pass affiliate nexus legislation — California for instance — the overall business model of affiliate marketing could have to change. I'm more worried about the industry just ceasing to exist, or if it continues to exist, changing radically."
However, Shankar, the Texas A&M professor, said it's not likely the affiliate marketing industry would die out — but he said it might have to remake itself.
"If all the affiliate marketers shut down, Amazon would take a huge hit with shareholders; sales would dip, stocks prices fall. The Internet is now so large, no single retailer can generate all the traffic...no matter how great a name they are," Shankar said. "So I don't think the industry is going to go away that soon; They'll just have to find different ways to evolve."
