Online businesses say tax bill will hurt sales

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Don Mayer and "the original small dog," Max. Photo by Josh Larkin.

Last week, the House passed an Internet sales tax bill that, in theory, would force out-of-state Internet giants like Overstock.com and Amazon.com to collect sales taxes on the products they sell to Vermonters.

The two-page bill, H.143, passed on third reading Thursday, and on Friday morning the Senate sent the legislation to its Finance Committee. An identical piece of legislation, S.54, introduced by two unlikely comrades in arms — conservative Sen. Richie Westman, R-Cambridge, and ultra-liberal Sen. Tim Ashe, D/P-Burlington, is also in play.

The legislation, in other words, is on a trajectory toward enactment.

On the face of it, the bill seems like the perfect, no-political-will-required piece of legislation: After all, it targets monolithic, out-of-state corporations. Plus, it could generate $30 million to $40 million in much-needed state revenue — that is, if the Tax Department actually received sales taxes collected by these companies.

Like consumers in most states, Vermont’s residents are supposed to voluntarily pay a 6 percent sales tax on online purchases when they file annual income tax forms with the state Tax Department. In practice, however, the honor system hasn’t been particularly effective.

Meanwhile, brick-and-mortar stores are required to collect the tax on behalf of the state. Rep. Jeff Wilson, sponsor of H.143, says charging Internet retailers the same tax is a way of leveling the playing field.

Don’t be surprised, though, if the Vermont legislation hits a roadblock once it’s taken up by the Senate Finance Committee. A rallying cry has already gone up: Local bloggers and in-state retailers affiliated with Internet sellers, large and small, would be hurt by the new provision, and they’re organizing a campaign to fight the proposal.

If H.143 or S.54 becomes law the tax would go into effect in July 2012, but some Vermont Internet retailers and bloggers say Amazon.com and the other large companies they work with will pull out of the state immediately, and they would, as a result, either go out of business or lose a significant portion of their income.

Hundreds of Vermont companies, including Small Dog Electronics and Outdoor Gear Exchange, business leaders say, are “affiliates” of companies like Amazon.com, that is, they have mutually beneficial sales relationships with large online retailers or provide an advertising platform for Internet companies. They also profit from the competitive edge they have over brick-and-mortar stores in other states that must collect sales taxes.

Don Mayer, CEO of Vermont-based Small Dog Electronics, objects to the legislation because he wants to maintain his competitive advantage over brick-and-mortar Apple computer stores in states around the country that must collect sales taxes. In a comment on VTDigger.org last month, Mayer wrote that 40 percent of the company’s $20 million in revenues come from online sales, and “implementation of the Internet sales tax would result in a significant decline in our out-of-state sales.”

Aaron Ritchie, who runs a website from his home in Williston and gets a cut of the sale of Music123 products, says he would have to shut down his lucrative website or move out of state if the law goes through because Music123 would likely stop advertising in Vermont.

Mike Donohue, co-owner of the Outdoor Gear Exchange, says he would lose a third to half of his online sales. The Exchange, which operates a popular store in Burlington, also runs a website called Gearx.com, which also sells products directly through Amazon.com.

Amazon fights sales taxes state by state

Would Amazon and other major online retailers really leave Vermont? If the way Seattle retailer and others have responded to other states that have tried to impose sales taxes is any indication, the answer is a definitive yes.

When North Carolina and Rhode Island adopted similar legislation, Amazon dropped affiliates immediately. On Friday, just days after Illinois passed an Internet sales tax law, the Seattle-based retailer announced it would no longer do business with affiliates in that state as of April 15. Overstock said it would pull out on May 1.

According to an Associated Press story, Sears Holdings Corp., Wal-mart Stores Inc. and Barnes & Noble Inc. want to pick up the affiliates on their websites.

California is considering a similar Internet tax measure, and Amazon has warned that it will abandon associated businesses there as well. Other states considering legislation include: Kansas, Kentucky, North Dakota and Washington.

As The Wall Street Journal put it, “Amazon’s battle with state governments over sales taxes is escalating.”

When the Hawaii Legislature passed a bill in 2009, Amazon cut off its ties to affiliates immediately. Several days after the governor of the island state vetoed the legislation, the company re-established its relationship with associate businesses.

Vermont’s legislation is patterned after the 2008 New York state law now being challenged by Amazon in the courts. Though the retail giant is collecting the tax for New York in the meantime, it is continuing to fight the state in court.

There’s no logical reason to walk into a store and pay sales tax (while) online you wouldn’t.”
~ Mike Donohue

In 1992, the U.S. Supreme Court ruled that Internet retailers that don’t have a physical presence in a state — employees or office or warehouse space — don’t have to pay sales tax to states or municipal governments.

The New York law shifts the understanding of physical presence. It says that if a third-party entity in New York state is engaged in sales on behalf of another business, that counts as a physical presence, too.

Those third parties are known as “affiliate” websites. Typically, the affiliates are online community newspapers or blogs that post ads for Amazon.com or Overstocks in exchange for a commission for every sale the online retailer makes. Any time you see an ad for, say, a Kindle on an independent website, an “affiliate” vendor is attempting to make a little money in commission sales of that product.

Online companies with a physical presence in Vermont already collect sales taxes for the state, as required under a 1992 Supreme Court ruling. Companies like Amazon, Overstock and others don’t maintain stores, warehouses or offices in Vermont, and so aren’t liable to collect the taxes. Those virtual companies would be, however, under the new Vermont legislation because they use affiliates based in Vermont to sell their products.

Last month, Paul Misener, a policy analyst for Amazon, warned lawmakers that his company would also pull advertising and business relationships with Vermont businesses if the state passes an Internet sales tax law.

In 2009, about 1,000 Vermont affiliates generated $48 million in revenues and paid $3.4 million in state income taxes, according to the Performance Marketing Association, a national industry trade group.

Law would have “sizeable impact”

How worried are Vermont companies about the bill? They are trying to band together to raise money to hire Paul Tencher, former campaign manager for Deb Markowitz and chair of the Vermont Democratic Party’s coordinated campaign, to lobby on their behalf, according to Mayer of Small Dog Electronics.

He says his company is an affiliate and sells some products on Amazon, but said he is mainly concerned about losing his competitive advantage and having to collect taxes for thousands of taxing districts should states, counties and municipalities across the country adopt bills like the one proposed in Vermont. If that happened, he said his company would lose 60 percent of its online sales.

“The advantage we have in selling outside the state is we do not have to pay sales tax,” Mayer said. “When I sell a computer in New York City, a customer gets an 8 percent or 9 percent advantage.”

Smaller outfits, websites like Aaron Ritchie’s UberProAudio.com, are part of an emerging advertising trend in which companies like Music123 and Amazon shell out a percentage of their sales revenues to bloggers that allow them to place advertisements on their websites.

Ritchie says Amazon and other companies that use websites like his to promote their products will fire all Vermont affiliates if H-143 becomes law.

Mike Donohue, co-owner of Outdoor Gear Exchange in Burlington, said he is “100 percent in favor of Internet sales being taxed at the same rate or a similar rate.” His company collects Vermont sales tax for any orders shipped within Vermont — he said it’s no different for a customer who walks into the store. Consumers from out of state aren’t required to pay sales tax online.

In addition to selling backpacks, bug dope, hiking boots, climbing and camping gear and so on from its website, Gearx.com, the Outdoor Gear Exchange sells products on the Amazon website. The company pays a commission to the Seattle retailer.

“We view their fee like advertising online,” Donohue said. He compared the Amazon placement with site engine optimization and adwords. “With Amazon, we don’t pay unless we have a sale.”

If Amazon left the state, Donohue said it would “penalize our business.”

Some consumers prefer the one-stop shopping experience on Amazon, he said, and placement on the site enables Gearx.com to reach out to customers it might not otherwise have access to.

“Of our online sales, it’s probably between a third and half,” Donohue said. “It would be a sizeable impact.”

Outdoor Gear Exchange would have to lay off workers at some point, he said, if the bill passes.

“It’s important to level the playing field (for brick and mortar stores),” Donohue said, but he argues Internet sales taxes need to be addressed on the federal level.

He points to a national Streamlined Sales and Use Tax Agreement, which was tabled in Congress last year when it was introduced under the Main Street Fairness Act, as a possible solution.

“We definitely support that … there’s no logical reason to walk into a store and pay sales tax (while) online you wouldn’t,” Donohue said.

Michael Mazerov, of the Center for Budget and Policy Priorities, said there is “no realistic prospect of Congress passing a Streamline Sales Tax Agreement in the near future.”

On the other hand, if states “hang together,” they can chip away at this problem, he said. In addition to New York, Rhode Island, North Carolina and Illinois, which have enacted laws that force Internet sales tax collection, Arizona, California, Hawaii, Mississippi and Connecticut are weighing legislation.

“I think if a sufficiently large number of states enacted these laws, the retailer would begin collecting the tax,” Mazerov said. “This is a critical and cost-effective way to market. They can get affordable solicitations from businesses without paying anything until the sale — that’s pretty cost-effective marketing.”

Eventually, the courts may rule in states’ favor, according to Mazerov, especially if enough of them pass similar laws limiting a local company’s ability to market products sold by a national Internet retailer. The legislation could also pave the way for Vermont’s attorney general to join with other states in a lawsuit.

Small Dog founder Mayer argues the Vermont legislation will be counterproductive because the state won’t be able to make the giant retailers pay.

“This isn’t going to create extra revenue for the state and … may cause current affiliates to close their doors or reduce the money they’re making,” Mayer said. “The people that are going to gain are Wal-mart and Sears.”

Read the story on VTDigger here: Online businesses say tax bill will hurt sales.