Policy Fugue by Kenneth Corbin (bio )

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Overstock joins Amazon's online tax revolt

By Kenneth Corbin on July 2, 2009 4:02 PM

Overstock has added its name to the list of online retailers taking their protest against new tax laws to the people.

The Utah-based firm has terminated its affiliate advertising programs in California, Hawaii, North Carolina and Rhode Island as those states edge closer to passing statutes that would require it to being collecting sales taxes.

The move closely follows similar announcements from Amazon and Blue Nile, who are protesting states' redefinition of tax codes that would equate affiliate marketers -- Web site owners who post ad links to online merchants and receive commissions for the referrals -- with full-fledged employees of the company, thus triggering the tax-collection requirement.

When New York became the first state to enact the affiliate marketing tax provision, Amazon and Overstock both sued in cases that are still working their way through the courts. Amazon kept its affiliate program and began collecting the tax. Overstock terminated its affiliate program in New York.

With yesterday's announcement, Overstock warned it would sever its affiliate programs in any state that moved ahead with a similar statute, blasting state lawmakers for essentially taxing their way into economic ruin.

"It's awful to have to terminate these relationships with affiliates, simply because they live in states where unconstitutional laws are being passed," Overstock CEO Patrick Byrne said in a statement. "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."

Needless to say, the termination of affiliate advertising programs is a significant departure from a strategy of litigation. It seems that Amazon, Overstock and others are aiming to whip up protest from their local affiliates, who can fairly claim that they're getting shafted in the process. After all, a statehouse passes a law, the large online retailers react, and a source of revenue for the little guys in those states evaporates.

Now, as has been argued here in the past, this debate too often focuses on rhetoric about new taxes, when what's really happening is a shift in the burden of collection for an existing tax.

States with sales taxes already require consumers to report online purchases from out-of-state merchants (for which sales tax wasn't collected in the transaction) on their income tax returns. This is called use tax. The problem is, most people either don't know about the requirement or ignore it. Catch me if you can, essentially. State tax collectors can't reasonably audit every citizen to catch all the purchases they made online throughout the previous year. So the tax generally goes uncollected.

The tens of millions of dollars in lost revenues were easier to overlook in flusher times. But at a time when cash-poor statehouses are struggling to overcome budget shortfalls, the idea looks better and better, particularly as e-commerce grows into a larger segment of the economy.

But then there's the little matter of the Constitution. Amazon, Overstock and their comrades cite a 1992 Supreme Court decision that established the term "physical presence" as the criterion for the sales-tax collection requirement. If a company has a physical presence in a state -- a warehouse, call center, sales representative, etc. -- it must collect sales taxes on purchases made by that state's residents.

What New York did and a handful other states are mulling was to broaden physical presence to include an online retailer's affiliate marketers. It's certainly a novel interpretation of the tax code. One can imagine that as the matter works its way through the New York courts, it could, at some point, end up before the Supremes again. After all, commerce has changed a lot since 1992, the last time the court weighed in on the interstate taxation issue.

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