State tax laws restrict major players in e-commerce arena

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Overstock.com cut contracts with California affiliates after a new Internet sales tax was enacted
Overstock.com cut contracts with California affiliates after a new Internet sales tax was enacted

E-commerce giants Amazon.com and Overstock.com terminated all advertising contracts with California affiliates early last month, shortly after the State Assembly passed an Internet tax bill extending the Golden State's 7.25% sales tax to online retailers. The decision by lawmakers in the nation's most populous state follows similar moves by 
Illinois, Arkansas, Connecticut, North Carolina, Rhode Island and New York. 


Overstock.com president Jonathan Johnson said the California law is unreasonable because Salt Lake City, Utah-based Overstock has "no physical presence in California, no offices, no employees and no warehouses." He added that it violates the 1992 Quill Corp. vs. North Dakota decision, which said retailers that do not have a physical presence in a state do not have to collect and remit sales taxes there. 


"They say this bill will raise $200 million. That won't be true. It hasn't been true in any other state where this bill has passed," said Johnson, who added that the company cancelled contracts with "hundreds" of affiliates. "Small businesses in California that are paying income tax are now losing the income they were getting from Amazon, Overstock.com and others." 


Seattle-based Amazon.com sent an email to affiliates referring to the law as "unconstitutional and counterproductive" and claiming it was "supported by big-box retailers...that seek to harm the affiliate advertising programs of their competitors." It terminated contracts with 10,000 affiliates. 


The e-commerce companies' in-state partners said they are suffering significant loss of revenue because of the law. Rob Smahl, CMO of Ebates.com, an online coupon 
company, said his firm will lose between 10% and 20% of its revenue, depending on whet-her it can negotiate a new partnership agreement with Overstock. Meanwhile, Alan Gray, CEO of online news site NewsBlaze.com, said he lost about 70% of his advertising revenue as a result of affiliate terminations because out-of-state retailers stopped advertising on the site. "I'm almost at the point where I'm going to have to lay off all my contractors." 


Despite the blow to affiliates, the California State Board of Equalization, which collects state taxes, says the tax is necessary and will raise hundreds of millions of dollars a year for a state that has a whopping $10.8 billion budget gap. 


Bill Dombrowski, president and CEO of the California Retailers Association, said he is an advocate of the law and that the Quill decision should be overturned. 


"The difference between today [and 1992, the time of the Quill decision] is you can buy software for $200 that tells you how much sales tax to collect by ZIP code," he said. "It's not a burden to collect the tax, and it's not fair that online retailers get a 10% discount on every purchase. This law levels the 
playing field." 


Ed Stevens, CEO of e-commerce company Shopatron, said he supported the measure and asserted that "customers who purchase locally shouldn't be punished with higher prices" because of an "8% to 10% subsidy" for out-of-state retailers. 


"What's most important is that we give businesses a fair playing field," he said. "We all believe in the benefits of the free market. But the way the laws in California were structured, the government was telling people to shop from out-of-state retailers."

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