Online retailers Amazon, Overstock.com in tax dispute with states

Soon after dropping its California and Hawaii-based marketing affiliates over online tax issues, Overstock.com reversed its decision after state officials assured the online retailer that sales tax bills in those states won't become law.

The issue centers on legislation that requires companies to collect sales tax if they have marketing affiliates in the state. Affiliates earn money by posting ads for Overstock and its products on their Web sites. If a consumer clicks the link and buys something, Overstock gives a referral fee to the third-party Web site.

Amazon, which has a similar affiliate program, began dropping affiliates in Hawaii, North Carolina, and Rhode Island and issued a warning to California. Overstock followed suit, dropping affiliates in all four states, then changed its mind about California and Hawaii.

Overstock Chairman and Chief Executive Patrick Byrne got assurances from California Governor Arnold Schwarzenegger, who vetoed the legislation, The Wall Street Journal reported. "We couldn't be more pleased to have been directly told that the governor is going to focus on balancing the budget via cost cutting, and not by jamming consumers and small businesses with new taxes," Byrne said. Hawaii Governor Linda Lingle vetoed her state's online tax bill.

Rhode Island's new online sales law is in effect, while North Carolina's governor has not yet signed the bill. The laws force e-commerce companies to collect sales tax up front and remit tax to the state where the sale was made, which takes away one of the big plusses that Internet sellers have over traditional stores because Internet firms only collect sales taxes in states where they have a "physical presence."

Some states argue that third-party affiliate contracts with Overstock and other Internet retailers constitute a physical presence. New York was the first to pass a law that requires online retailers to collect taxes in any state where the affiliates operate. Both Amazon and Overstock fought the law in court and lost, but it is under appeal.

CNN reports that Amazon's scaled-back operations won't hurt the company much. Forrester Research says only 10 percent of Amazon's sales come from affiliates. Byrne says sales made through affiliates account for less than 10 percent of Overstock's revenue.

Exiting the affiliate business in North Carolina and Rhode Island, however, deprives those states of sales tax revenue, income for affiliates in the state, and income tax on those affiliates, the Journal reported.

"It's one of those things that on the surface looks interesting, but we believe the states are just shooting themselves in the foot," said Rebecca Madigan, founder of the Performance Marketing Alliance that represents affiliate marketers.

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