Amazon Tax: Developments and Implications
by Geno Prussakov, AM Navigator
One of the biggest hot-button issues of online retail goes by many different
names — “Amazon Tax” because of Amazon.com’s involvement
in fighting it in New York and beyond; “affiliate tax” because it affects
all parties involved in the affiliate marketing channel; and “Internet
sales tax” because of the subject of taxation. But the most appropriate
term is really “advertising tax.”
The inclusion of the word “Amazon” skews our
focus from the problem to a particular merchant
and its affiliate program. The word “affiliate,”
on the other hand, generally implies a different
meaning from what affiliate marketing relationships
really entail. The 2002 edition of the
“Compilation of State and Federal Privacy
Laws” by Smith & Sulanowski states that, “the
term ‘affiliate’ means any company that controls,
is controlled by, or is under common control
with another company.” Other sources refer
to such elements as common ownership, control,
and close commercial or operating ties
which, in fact, make the traditional business/
legal definition of an “affiliate” almost antonymous
to the online marketing meaning of the
term. In the context of digital marketing, affiliates
(sometimes called associates or publishers)
are independent marketers who may choose to
promote a business and be paid on a performance
basis. They are the ones who choose what
affiliate programs to promote or drop, what
merchants to push aggressively, and on what
merchants to spend less effort. They are selfmanaged,
and generally not accountable to
merchants for performance. They invest their own resources into advertising merchants, but
are not involved in the process of a sale itself.
Due to the fact that affiliates are being
unjustly singled out from the cohort of all other
advertising channels of both online and offline
merchants, the name “selective advertising tax”
may be even more appropriate. But I have
decided to go with “advertising tax” as the term
to use here
Historical Overview
In November 2007, New York Governor Eliot
Spitzer attempted to institute a bill to tax online
sales of companies with no physical presence in
the state, but that conducted business through
New York-based affiliates. Spitzer argued that
affiliates of a company should be perceived as
equivalent to a company’s physical presence in
the state. With backing from current New
York Governor David Paterson, that bill became
a law in April 2008. The next month,
Amazon.com filed a complaint in the State
Supreme Court in Manhattan challenging the
constitutionality of the “novel definition of
what constitutes a presence in the State,” and
objecting to the inclusion of “any Web site
based in the state that earns a referral fee for
sending customers to an online retailer” (or
hundreds of thousands of Amazon’s affiliates).
Overstock.com opposed as well, but along
with hundreds of other online merchants
decided to terminate thousands of affiliates to
avoid collecting the tax.
Along with the continuing economic crisis
and slowing online sales, the year of 2009
brought more bad news for affiliates. A New
York judge dismissed the Amazon lawsuit and
Overstock’s complaints and other states started
considering similar laws to help them deal with
deficits in their budgets. California’s Assembly
Bill 178, co-authored by Charles Calderon (D)
and Nancy Skinner (D), was prepared in
February 2009; at press time, the latest development
was the ratification of the North
Carolina Senate Bill 202. The latter has redefined
the terms in North Carolina to include
out-of-state merchants who reach $10,000 or
more in yearly sales to North Carolina residents
through North Carolina-based affiliates.
At press time, there were a total of 10 states
either already affected, or considering advertising
affiliate tax laws. Below is a list of these states and the statuses of the advertising tax bill
in each:
• Calif. – vetoed by Governor on July 1, 2009
• Conn. – postponed
• Hawaii – vetoed by Governor on July 2, 2009
• Ill. – draft regulation issues on Dec. 2, 2008
• N.C. – in effect as of Aug. 10, 2009
• N.Y. – in effect as of April 2008
• Md. – dismissed by committee on April 13, 2009
• Minn. – vetoed by Governor on May 21, 2009
• R.I. – in effect as of June 29, 2009
• Tenn. – postponed
Constitutional or Not?
The constitutionality of such a law has been
continuously questioned by Amazon since
early 2008, and picked up by Overstock in
some of its press releases and letters.
The case most frequently referred to is
that of the 1992 case of Quil Corp. v. North
Dakota. Back then, the U.S. Supreme Court
held that taxing an out-of-state business violates
the “Due Process and Commerce
Clauses of the Constitution” which “prohibit
a State from imposing the duty of use tax
collection and payment upon a seller
whose only connection with the State is through common carrier or the United States
mail.” Therefore, it is said that an e-tailer
must have a physical presence in the state to
be required to collect a sales tax. And since
the decision that set a precedent was made by
the Supreme Court, it is also being held that
unless Congress passes a legislation to delegate
broader powers to the states, it is unconstitutional
of states to do it on their own.
Whether the above assumptions are true or
not, we see the nexus continuously being redefined
to include electronic retailers that have
no physical presence in the states, but advertise
their products or services through affiliates.
Implications for Affiliates
Putting it all in perspective, we can define two
sets of implications: (i) those on the immediate
(state-specific) level, and (ii) those on the wider
(nationally-spread) level.
Immediate Implications
Experience has shown that when such bills
become laws, many merchants choose to terminate
affiliates in the affected states rather
than collect the additional tax. Recalling the
state of New York experience, Overstock terminated
New Yorkbased
affiliates —
as did CafePress,
Foot-smart, Jewelry
Television, uBid.com
and hundreds of other
merchants — in May
2008 after the state
passed the “advertising tax” law. This not only
caused thousands of companies to go out of
business, but led to larger consequences.
Wider Implications
Recent research by the Center on Budget and
Policy Priorities (cf: www.cbpp.org) predicts
that, “at least 48 states have addressed or still
face shortfalls in their budgets for fiscal year
2010 totaling $165 billion or 24 percent of
state budgets.” It is becoming contagious to
follow the New York example.
The snowball effect is already clear —
the number of states looking into such
anti-affiliate tax grew from one in 2008 to
almost a dozen in 2009. As deficits grow
and budgets get smaller, we are almost guaranteed
to see more states consider this
route. Both merchants and affiliates must be
prepared. Instead of practicing a reactive
approach, more merchants, affiliates and
affiliate networks should be proactive in
tackling the issue.
There is much written on the tax in various
affiliate marketing forums and blogs
(including mine), and it is important for
Internet marketers to self-educate on the
issue. At the same time, merchants should
not be quick to terminate affiliates —
instead, consider viable solutions. A recent
poll by Shawn Collins, co-founder of the
Affiliate Summit, showed that customers
generally do not mind paying an extra tax
on top of their online purchase — so why
not collect the tax? Additionally, all affiliate
marketers should be actively lobbying, writing
to and meeting with their state representatives
and senators.
There is a fundamental lack of understanding
on the issue in the legislative circles, and
unless a proactive approach is exercised, more
state laws like this are inevitable. The positive
results in Minn., Md., Calif. and Hawaii are
encouraging, but more waves will undoubtedly
follow. Are you ready?
About the Author: Geno Prussakov is a graduate of the University of
Cambridge, author of “A Practical Guide to
Affiliate Marketing” (2007) and “Online
Shopping Through Consumers’ Eyes” (2008),
popular speaker and affiliate marketing evangelist.
Prussakov is the founder and CEO of AM
Navigator, an outsourced affiliate program management
(OPM) company.


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