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Thursday, June 16, 2011

Does it make sense for states to sacrifice income tax revenue to try to increase sales tax revenue?

For years, Amazon.com has had an "Amazon Associates" program which allowed independent businesspeople with websites to have links to products on Amazon.com, and to make a small commission if someone follows a link and makes a purchase.

The commission percentages are generally in the single-digits, and earnings ranged from thousands of dollars per month down to almost nothing.

I recently formed an online bookstore aimed at writers, and became an Amazon Associate. The main purpose of the site is to provide links to the reviews on this blog and to promote books written by me, and by others. I had no dream of getting rich from the project, but merely hoped that the earnings would cover the cost of the website.

One reason for the success of Amazon.com and other online merchants is that millions of shoppers avoid paying sales tax by ordering products from a company in a distant state.

The law has been that unless a company has a physical location (a "nexus") in the state where an item is being shipped, no sales tax would be collected.

This was great for shoppers, but bricks-and-mortar businesses complained about the competition, and states complained about the loss of perhaps $7 billion in sales tax revenue.

Some states have gotten tough recently, maintaining that relationships with INDEPENDENT businesses -- including Amazon Associates -- provided a nexus equivalent to a corporate-owned warehouse or office in a state. They demanded that Amazon collect sales tax on purchases made through the efforts of Associates, and remit the taxes to the states.

Amazon ended the Associate status of websites in Connecticut (where I am) and in Arkansas after the states imposed sales tax on online purchases starting July 1.

Amazon said, "We opposed this new tax law because it is unconstitutional and counterproductive. It was supported by big-box retailers, most of which are based outside Connecticut, that seek to harm the affiliate advertising programs of their competitors. Similar legislation in other states has led to job and income losses, and little, if any, new tax revenue. We deeply regret that we must take this action."

  • It was estimated that with the change, Connecticut would collect about $10 million per year -- a tiny part of the $20 billion state budget.
  • Reportedly, nearly 3,000 Connecticut businesses affiliated with online retailers made $236 million last year from those relationships and paid about $7 million in state income taxes on the earnings.
  • While both the $10 million and $7 million figures are estimates, the $3 million apparent net gain to the state is infinitesmal, especially in view of the disruption, unhappiness and loss of income the new law will cause.
  • The nearly 1/4 of a billion bucks that would go to Connecticut businesses -- and be spent, saved and invested in Connecticut -- may go to other states.
I've made a few bucks each month with the program, and I pay income tax on the earnings. Without me, Amazon will still sell books to Connecticut residents, and still won't remit sales tax to Connecticut, but I'll pay less income tax to Connecticut. How has Connecticut gained with the new law?

As a consumer, it's been wonderful to make purchases without paying sales tax. As a business owner, it's been great to be able to sell across my state border and not collect sales tax. However, I do realize that the present situation cannot continue forever. The country needs a simple national sales tax policy that will apply to internet, catalog and phone orders. Then, maybe, the Amazon Associates program can be restored.


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1 comment:

  1. How do so many idiots get elected to office?

    Other idiots vote for them.

    ReplyDelete