(*None of this information has been approved by an attorney or a legal tax accountant- please seek qualified legal advice if you are facing difficulty with the Amazon Tax)
Hi folks,
I keep receiving questions about the “Amazon Tax” fiasco and I keep pointing people one at a time to Jerry West’s video and article on the topic. I might as well cover the whole thing once here.
This will be old news for some of you but apparently not for everyone.
Jerry lays it all out in the Amazon Affiliate Tax update video.
The bottom line is that Amazon paid the state of New York several million dollars- no questions asked- when legislature passed a “state sales tax” for affiliate sales. (Cough sputter) Other states started jumping on the bandwagon.
Why the mass legislation?
Because most states are short of money these days. There is one prediction that says 46 out of 50 states could face bankruptcy or at least severe budget shortfalls.
As Jerry West points out, even thought Amazon paid off New york, they have sent out cancellation notices to affiliates in several other states including Rhode Island and my own home state of Hawaii. I live here in Kapaa. There has been a huge buzz about this from all of the expert affiliates living on the Islands of course, because it costs money to stay here, and if you have a lot of income coming from affiliate programs, there are not really new jobs here if suddenly you lose your income. (Diversify, diversify, diversify).
Hawaii vetoed this “Amazon Tax” law of course, because the citizens of Hawaii tend to be rebelious and the public interest is defended extremely quickly. In other words, people are paying attention to every “Tax Party” that comes along. And right now many states are pulling all kinds of Shananigans like this.
Leslie Rohde and Jerry West also point out: “Federal Commerce Clause prohibits an individaul state’s imposition on Interstate Commerce if there is no physical location represented.” In other words, forcing a business in one state to collect a sales tax froma business in another state would be extremely difficult. It would also be detriment to doing business from state to state.
The reasons the Amazon Tax is not subjected to this Federal Commerce Clause is because they are viewing affiliates as “field agents” and therefore the claim is that these “agents” represent a physical location.
Lynn Terry makes the point that this is a convenient work around designed to get the affiliates to do the “bookeeping” that is difficult to enforce- which is essentially to keep track of out-of-state sales products, goods and services.
This issue will probably argued in courts for years but let’s talk about some suggested solutions and my personal opinion about them.
Suggested solutions to the Amazon Tax:
1. Move out of the state that passed the law.
Give me a break. Even if you move what happens when the Tax Party non-educated politicians decide tograb your income in the next state?
Hundreds of millions of dollars in REAL tax revenue is lost to the state for passing this tax in legislation, because it could increase unemployment, cause some businesses to go under and decrease the state GNP overall.
2. Move your business over seas.
Personally, this is one of my favorites, but this is a pretty complicated thing for most people to do. A vendor can still cancel your account if they suspect you have a virtual phone number or if you raise any other sort of red flags.
3. Create a separate company in one of the “protected states” that handles all of your affiliate accounts.
They should handle your mail, your phone, etc. According to West you may be able to use services like Divinci Virtual to make this easier. (We have not tried this method oursleves) You MUST have someone local to answer your phone in order to sidestep this Amazon issue at a state level. An auditor will sometimes match your caller ID to the weather in that protected state in order to check for fraud.
Towards the end of his video Jerry briefly mentions the “new audit procedures” being prepared by the IRS that will require you to create a pivot company associated with your new out-of-state virtual organization, but he does not talk about what this is.
I feel very cautious about solution number 3, until I know more about the details.
(Here is a solution that is not a direct solution but one that was suggested in a conversation with another online mogul)
4. They play against affiliate profits will probably increase at the federal and state levels as the economy does whatever it is being engineered to do. Try diversifying your business into direct product and service sales as a back-up plan. I know this seems obvious, but it is easier said than done if most of your income comes through second tier sales, affiliate and referral commissions. Remember that the lead generation industry at large is also under investigation by the FTC because of its extreme profitability. This was a hot topic at Leads Con this year. It is something that is on peoples minds, especially my friends who are raking in the cash through the sales and distributions of vertical leads.
Zooming Out
What the heck is going on here folks?
The era of the “virtual organization” is having a massive impact on the way that the world does business across international and state lines. Tom Peter’s predicted much of this in his book Re-imagine in 2002. While the Long Tail revolution has its advantages by increasing consumer choice and removing the tyranny of location, it is met by many state and federal authorities with suspicion and fear. The reason is simple; you cannot control (or TAX) what is not recorded.
The money is in the data.
The problem with affiliate programs in the eyes of a state desperate for cash is that it is very difficult to record the data and tap into the cash flow. For a few years ecommerce has threatened many legislative agendas to control and tax cash being spent across state lines. Although affiliates are taxed on their earnings, they should also be taxed when they sell something for a vendor?
I do not need to remind you that the Amazon Tax is only one of dozens of “crazy talk” Tax Party extraviganzas taking place in several states as legislators try to grasp any extra cash that is floating around in cyberspace. Since 1996 the Feds have been trying to lobby the Internet Tax being blocked in 1998 by the Internet Tax Freedom Act. This law bars federal, state and local governments from taxing Internet access and from imposing discriminatory Internet-only taxes such as bit taxes, bandwidth taxes, and email taxes. The law also bars multiple taxes on electronic commerce.
The thing that bothers me about Jerry’s Amazon Tax situation is that State legislation is making the issue more about location rather than sales tax, which is not exempt by the Internet Tax Freedom Act. This is troubling because it creates a double taxation through a scheme, which targets the common breadwinner in particular provinces (states) within the “empire” of the Unites States. (Yes, I am beginning to view the United States in terms of Taxation of the Roman Empire.) It also hurts the bottom line of the vendor who is creating jobs, spreading money around, and providing opportunity for ordinary citizens. It is this sort of increased emphasis on double taxing or limiting the “virtual bank account” of the common man which is a red flag to me. It is of course no surprise.
Taxes in the Roman Empire, in comparison with modern times, were certainly no more excessive. In many cases they are far less per capita than anything we can compare to today. However, the strain of tax revenues was heavily placed on those who could most influence the economy and it would have dire consequences. The economic struggles that plagued the late Imperial system coupled with the tax laws certainly played a part in the demise of the world greatest empire.
Let me be clear.
I am not a doomsdayer. There is TONS of money being made on the internet with the lions share of most marketing budgets being spend on social and search engine marketing. I will let the “interactive marketing spend” fiscal numbers and predictions speak for themselves.
I only want to point out that it is important for every citizen in every state to pay attention to the Internet changes coming down the pike and take action at a local level in order to reprevent silly tax laws designed to line pockets in the short term via short sited legislation. In Hawaii we were able to ward this sort of craziness off via active community support because of individuals like Jerry West who are very public (and transparent) about the issue.
- Russell Wright
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