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Will New Tax Laws End Amazon’s Affiliate Program?

On Tax Day (ironically, or maybe intentionally), Amazon will sever all ties with affiliates in the great state of Illinois, including (also ironically) film critic Roger Ebert.

Back in January, Ebert took some flack from Twitter followers who didn’t think it was right that he Tweet Amazon links. The critic explained in an interview with ClickZ that the small amount of income he made from the links went to keeping his website free for all to read and I agreed. A few ads and a few clicks is a small price to pay in order to keep reading articles such as his half-star review of Battle: Los Angeles. Now, we find the fight was for naught, thanks to a new law signed by Illinois Governor Pat Quinn.

The new law requires Amazon to pay sales tax on items shipped to Illinois as long as they have affiliates operating in that state. You see, according to a 1992 Supreme Court decision, online sellers only have to pay local sales tax if they have a physical presence in the town where the product is going. Generally, this is seen as a brick and mortar store, but the new Illinois law says an affiliate who lives in the state qualifies as a “physical presence” and so taxes must be collected.

The original law is called the Main Street Fairness Act and is meant as a way of protecting local retailers from being sunk by lower prices on an internet site. But Illinois’ decision to count affiliate programs isn’t going to help local retailers at all. In fact, it’s going to hurt. Instead of paying out the extra money, Amazon has chosen to cut ties with Illinois affiliates and that’s a big loss for some residents.

Scott Kluth, founder and CEO of Chicago-based CouponCabin.com, told the Chicago Tribune that the new law was “deeply disappointing” and said his company is “actively exploring” moving to Indiana.

It doesn’t end there. Colorado, North Carolina and Rhode Island all have similar laws and Amazon has already pulled affiliate deals or is involved in an active court battle. California and Vermont aren’t far behind.

From a customer standpoint, this new law means business as usual, but for the internet marketer, it could mean the beginning of the end. If enough states switch over to the new rules, will Amazon give in and begin collecting taxes or will they simply end their affiliate program?

If they do decide to cut and run, there will be a lot of poor internet marketers come the end of that quarter.

  • http://leodimilo.com Leo Dimilo

    Actually, it doesn’t mean business as usual for the consumer. Tax increases typically have a trickle down effect with the consumer at the bottom. If Amazon can’t give as competitive of pricing because suddenly the states are going to tax them, then they have a choice-

    1. Adjust the prices to fit the new tax laws.
    2. Cut something else out to cope with the added expense.

    Right now, their decision has been to cut out affiliates (which make 4-8.5% per sale) so in a sense, you are right. However, if the lose of visibility across the web cuts into their bottom line, they may opt for the other option.

    Nearly bankrupt states are scrambling to find any way to handle their shrinking budgets. Usually, if they can tax something new in which it isn’t apparent that a large segment of the population is affected then they are going to go there.

    Everyone talks about Amazon because they are the big boys on the block. What they aren’t talking about are the “mom and pop” internet stores that this affects as well.

    As an affiliate, I hate it. But this should concern more than just Amazon. As more and more states approve this type of tax, I think you are going to see a reduction of value when shopping online. And when that happens, it won’t be business as usual for the consumer.

    • Delbert Farr

      I think you’re misreading it. It will be biz as usual for the customer, because the customer will still pay no sales tax.

      Once Amazon cuts off its affiliates, it will not have to collect sales taxes on sales to customers in the state where the affiliates were. (no affiliates in state means Amazon has no “presence” in the state.) The bottom line to Amazon will be the same (collect no sales tax), as it will be for the customer (pay no sales tax). Only the affiliate gets hurt.

      • http://leodimilo.com Leo Dimilo

        Oh Delbert,

        You are right. I feel like an idiot now. Totally didn’t think about the Nexxus laws and why Amazon will get taxed…..

  • http://twitter.com/jjolsen JJ Olsen

    This is great news. I can finally take my filter off and allow Ebert’s spam tweets through.

  • Justin L

    Leo,

    Amazon themselves are not being taxed on purchases within IL, which is why it remains business as usual for the consumers. Purchases from Amazon.com and 3rd parties who sell through amazon.com & reside outside of the state (but not affiliates) will still be tax free, since Amazon, by shedding its IL affiliates, has kept itself from having a physical presence in the state.

    • Anne

      Justin,

      Not tax-free, tax-evading. As far as I know, every state in the union that has a sales tax requires an individual residing in that state and receiving products through the mail from another state to pay taxes on them. It’s called the Use Tax and you’re supposed to pay it on your annual income tax form. We haven’t done that habitually. This is an effort by states to do one thing we always tell them to do when times are tough — do a better job of collecting the taxes they’re already entitled to.

  • http://www.plrandmorestore.com PLR

    The overriding problem here isn’t Amazon, it’s the State. The issue is spending, not taxation. There’s a good reason businesses are flocking out of Illinois, California, etc…

  • http://cinerater.com Dudley

    Glad I don’t live there. I am an affiliate and definitely think it’s a good way for the average joe to make some much needed mulah to feed the family. My Yamaha RX-A2000 Review will, I hope help me and my family in this way, but that remains to be seen. My fingers are crossed:) Great site BTW!