The war between states and the Internet has begun! Ok, that might be blowing things out of proportion a bit, but the situation has certainly heated up. The lowdown? Certain states think it's unfair for Internet retailers to operate and sell within their borders but not have to worry about sales tax. A 1992 ruling by the Supreme Court said that retailers can't be expected to collect sales tax unless they physically operate within the state.
Recently, a landmark blow was struck in California. The Golden State thinks they may have found a way around that Supreme Court ruling. Major retailers like Amazon operate not only by directly selling to customers but also by working through affiliates. These affiliates operate their own businesses but refer customers to Amazon, who actually stocks and ships the products.
California law now states if affiliate sales result in substantial sales for Amazon, then they are considered as having a physical presence in the state. Officials in the state hope that this will result in a huge increase in state tax revenue. Considering California (and many other states) is more than a little strapped for cash, it could mean a huge change for ecommerce sellers in that neck of the woods.
While increasing sales tax revenue was the idea, it turns out that wasn't exactly what happened. Amazon and other Internet retailers immediately pulled their support and connection from their affiliates. Instead of gaining sales tax funds, the state now risks alienating Amazon affiliates - and actually hurting small business and jobs. Some business owners even see no recourse but to move their physical location so they can operate as usual.
This also means California is losing out on lots of revenue that was formerly coming into the state. Because these local affiliates are now out on average 35% of their usual funds, they aren't spending it in the state. More so of course if they are forced to leave the state entirely to operate their business elsewhere!
California is the seventh state to attempt this, and the seventh to be hit with controversy and backlash. Amazon is even suing the state of New York over their attempts to collect sales tax, which could subsequently affect the California law.
What This Means
As the fight between Internet retailers and states spreads across the nation, you must decide what you're going to do. Are you an affiliate for one of the big dogs like Amazon or Overstock? Do you operate your store through eBay or Etsy? Then it's time to think of a plan (unless you're in a state already hit by it...then it's way past time).
For instance, in California, the law is if you make more than $10,000 through an affiliate and more than $500,000 in another state then you have a physical presence there. So if you believe you won't make near those numbers, you may have no problem operating in those states as an independent store.
If you operate in a state which plans on enacting a law like California's, you may have more options than just moving away. Consider hitting up all the contacts you've made over the years from working with Amazon to strike up more (non-Amazon) business. It may also be a good idea to contact other Internet retailers and trade associations and start a "union" of sorts to help each other out. Not only could it help drum up more business, you may find partners in the fight against your state's laws.