The Other Side of the Amazon Tax Debate
DJ is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Should Amazon (NASDAQ: AMZN) have to collect sales tax?
The coverage on the issue seems to be fairly one-sided. Local small businesses feel that online retailers have an advantage because they only collect sales taxes in states where they have a physical presence.
This line of thinking ignores the fact that many shop online for convenience, not to avoid sales tax. It also ignores the disadvantage of shopping online- shipping costs, and waiting for the product to arrive. But more importantly, this debate leaves out the other small businesses that would be hurt if online retailers were forced to collect sales taxes across the board.
When it comes to the “Amazon tax,” the main issue seems to have stemmed from Amazon’s affiliate force. (Some also have an issue with their warehousing practices, but that’s beyond the scope of this piece.) The main problem is that people do not understand what affiliate marketing is.
When the issue is explained, most often it’s framed as Amazon has hired hundreds and thousands of sales reps to sell their products online; and therefore they need to collect sales tax in the states where these representatives live. That depiction is not quite accurate.
While Amazon does have affiliates as independent contractors, the relationship between Amazon and these affiliates is not one where these affiliates are collecting money and processing transactions for Amazon. The relationship is more like Amazon is buying advertising, and only paying if someone purchases something. The main point that’s being missed is that affiliates simply direct people to Amazon’s website; they are not processing payments, mailing out orders, or anything of the sort.
For example, let’s say I run a website about cars. One day I might decide to write an article about my favorite car magazine. When I mention the name of the magazine, I put a link to Amazon’s website with my tracking code appended to it. If someone clicks on the link, they are directed to Amazon. If they buy something, I get paid a commission. This does not constitute Amazon having a physical presence in my state, but it’s being presented as if it does. However if Amazon were to just buy an ad instead of just paying for performance, then no one would even be questioning this.
That’s a very simple example, but the fact remains that there are many small businesses that rely on this sort of business model in order to generate income. Bloggers, coupon websites, and various content websites have a business model that’s either completely or partially based on affiliate income.
Forcing sales tax solely based on performance-based advertising won’t necessarily hurt Amazon, but it will hurt many small businesses.
Also, this issue goes beyond Amazon. They are not the only online merchant who uses affiliates. Furthermore, the merchants who do use affiliates will simply drop the affiliates who live in states where this “affiliate tax” legislation comes up. It’s already happened.
So, the states will not get the tax money because the businesses no longer have affiliates in that state. Plus, the small businesses that relied on that income will either have to relocate to another state, or they are out of luck. So not only does the state not get the sales tax money, but now they’ve lost the income taxes that they would have received.
Why isn’t anyone paying attention to this?
So when it comes to the “Amazon tax,” it’s not just about Amazon. It’s not some David vs. Goliath battle as it’s being portrayed. There’s another side to the debate, and that should be considered. Because presenting this as a “small business issue” without mentioning all of the small businesses is extremely misleading.
DJ Nelson does not own shares in any of the companies mentioned in this entry.