Not everyone thinks it is (particularly online retailers), but there are plenty of tax proponents pushing for a change.

In 1992 a Supreme Court ruling made it impossible for states to tax a retailer who does not have an office, store or warehouse in that state.  This case was in response to a dispute regarding a catalog mail-order company, but the decision trickled down into online companies.  (The physical presence of a retailer is legally referred to as “nexus.”)

As the date would imply, this ruling did not take into consideration the vast impact online retailers would have on the sales industry.  In the eyes of most brick and mortar establishments, the lack of taxation for online retailers puts offline stores at a disadvantage.  According to New Rules Project, a program dedicated to improving local laws, the tax exemption creates three main issues:

• Gives a 4% to 9%  price advantage for online sellers
• Displaces and deducts funds from state tax reliant institutions; i.e. schools, police, etc.
• Excludes consumers from savings opportunities if they don’t have a credit card, Internet or home mailing address needed for online purchasing

Affiliate Nexus Tax

State governments, desperate to collect, hurried onto the scene and presented the Affiliate Nexus Tax.  Backed by the brick and mortar businesses who thought it would level the playing field, the law was passed in eight states.

The rushed and ill-informed law cost affiliates dearly.  According to the Performance Marketing Association (PMA), 60,000 small businesses had their incomes constrained by the new tax as affiliate programs dropped their partners located in the effected states.  Additionally, state revenue was not generated as a result.

Are The New Tax Bills The Answer?

Players on both sides of the fence seem to think that the bills being proposed could offer a suitable solution.  Due to the complexities surrounding state-to-state sales taxes, the bipartisan legislation being discussed would create a uniform way in which states could tax online retailers.  One option being considered is basing the sales tax on the buyer’s address.  In this circumstance, states would be required to provide software for online retailers to track the information.

Supported by online mega-stores like Amazon and traditional vendors like Sears, the bill seems to satisfy both markets.  However, other Internet-based companies, such as eBay have spoken out in opposition to the new bill.  Electronic Retailing Association president Julie Coons is another to adamantly oppose the tax proposal.

“New and misguided remote tax schemes will devastate electronic retailers working to survive in these harsh economic times. Massive cost increases and new regulatory burdens will significantly damage consumers and the marketplace on which they rely,” said Coons.

What Do The New Tax Proposals Mean For Affiliates?

In a November 30 press release, PMA, a not-for-profit association that advocates for the performance marketing industry, announced its support for the MEA and MFA.  The association asserted that the acts “will create a constitutional framework for collecting sales tax online.”  PMA seems to believe affiliates will benefit from the move because it will help them avoid the damaging Affiliate Nexus Tax.

PMA has also noted that if the bills were to pass affiliates who were dropped because of the Affiliate Nexus Tax would be able to reinstate their agreements with out-of-state retailers.

A portion of the bill excludes taxation on smaller businesses.  Sellers whose gross annual receipts in the United States don’t exceed $1,000,000 or don’t exceed $100,000 in the state will not be susceptible to this tax.   For many affiliates, this inclusion could protect their business.

However, executives from both eBay and NetChoice voiced their disapproval regarding the “anemic” exception made for small businesses.  They claim the pieces of legislation as they stand will not do enough to protect small and midsize retailers.

In these early stages, the full impact of the bills is difficult to determine, but online retailers should make a concerted effort to stay abreast of the details available.  The enforcement of online taxes is beginning to seem unavoidable, but the effect it will have on affiliates is still to be seen.