June 29, 2011 / 9:31 PM / 8 years ago

Small Web firms caught in "Amazon tax" fight

CHICAGO (Reuters) - The push to force e-sellers like Amazon to apply local state taxes toward online purchases will impact thousands of small Internet companies and is “bad public policy,” said Web entrepreneur Oliver Roup.

Oliver Roup, the founder and CEO of San Francisco-based Web startup VigLink, is seen in this undated handout photo. REUTERS/HO/VigLink

Brick-and-mortar retailers are upset that Amazon (AMZN.O) doesn’t collect state taxes from its customers, claiming the Internet powerhouse has a sizeable competitive advantage over local sellers which are forced to charge the tax.

Roup's San Francisco-based VigLink (www.viglink.com), which makes money helping Web publishers host ads from Amazon and other e-sellers like Overstock (OSTK.O), has been caught in the crossfire. It and the so-called affiliate marketers it represents could be driven out of business if Amazon decides to stop selling in their state, which it has done after losing battles in Connecticut, Rhode Island, North Carolina and Arkansas.

“We’re doing well but things are fragile,” insisted Roup, 36, whose Google-backed company was in the unfortunate position of having both its offices located in states threatened by new tax laws - California and Illinois. It already moved six workers from its former Chicago office over state lines into Whiting, Indiana.

“If we lose Amazon, there’s a possibility of a cascade,” he said. “The argument we’re trying to make is that this is just bad public policy.”

Illinois’ Main Street Fairness Act, effective July 1, requires any company with a selling presence in the state - either physical or virtual - to collect sales tax on all purchases made by state residents. The new law equates Amazon’s ads on these affiliates as a selling presence and forces the e-seller to either collect the tax or sever ties. In most cases, Amazon has stopped using affiliate marketers, as it did recently in Arkansas.

“Those Arkansas residents will no longer receive advertising fees for sales referred to Amazon.com,” the Seattle-based company said in a recent email to affiliates in Arkansas, which along with Illinois and Connecticut, enacted legislation this year. North Carolina and Rhode Island passed laws in 2009.

In other states, such as South Carolina, Amazon has staved off legislation in exchange for job creation in the form of a distribution center. It is making similar overtures in Texas.

In New York, which passed e-commerce legislation in 2008, Amazon is suing the state. CEO Jeff Bezos has publicly stated his desire for federal legislation to resolve the issue (here).

“It’s unlikely any congressional measure would be introduced in the near term,” said Jamie Yesnowitz, a senior manager specializing in state tax issues with the accounting firm Grant Thornton. Factors working against the legislation include the current political climate fostered by the Republican-controlled House and reluctance by states to have tax issues interfered with on a federal level, Yesnowitz said.

“This type of legislation could be viewed as a tax increase, even though a lot of people argue it’s simply enforcing the law that should already exist,” Yesnowitz added. “There’s not much incentive.”

That’s small consolation to thousands of affiliate marketers nationwide, which argue their livelihood is being disproportionately scapegoated by what has become known as the “Amazon” tax. They face closures, relocation or drastic cuts that translate to job layoffs.

The Performance Marketing Association, a Los Angeles-based trade group representing the marketers, has filed suit on behalf of the Illinois affiliates and is lobbying against new state measures, including the emerging tax legislation in California it said could impact some 25,000 sites in that state alone.

“Running an ad on a website is in no way, shape or form the same has having a store,” said the group’s executive director Rebecca Madigan, citing precedence in a 1992 Supreme Court case, Quill Corp v North Dakota. The case found direct marketers such as catalog sellers were not liable for collecting tax in states where they didn’t have a physical presence.

“It’s the big-box retailers pushing for this,” insisted Madigan. “Wal-Mart has this agenda; they’re trying to kill Internet sales.”

Bentonville, Arkansas-based Wal-Mart (WMT.N) declined to provide a statement, deferring its response to the Washington, D.C.-based Alliance for Main Street Fairness, a lobbying group it supports. The Alliance is promoting the state measures it claims will level the sales-tax playing field.

“The objective of the organization is to reach a point where every business is operating under the same set of rules,” said spokesman Danny Diaz, adding that support came from thousands of businesses, large and small. “You’re going to reach critical mass - the federal government will be forced to act.”

Web entrepreneur Tim Storm didn’t waste any time when he heard Illinois was going to implement the new tax. Just three years after building a $5-million office complex for his 56-person online couponing company, Storm moved the entire operation across state lines to avoid a crippling tax hit.

"Do I want to stay here or move to save 30 to 40 percent of my business?" said Storm, 43, who in April relocated FatWallet (www.fatwallet.com) just five miles over the border to Beloit, Wisconsin. "It's not even a question that had to be considered for any length of time. We set a moving date before we knew where we were moving to."

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