Web retailers, states tussle over tax rules

NEW YORK — In a big break for online shoppers, Web retailers generally don't have to charge sales taxes in states where they lack a store or some other physical presence.

Increasingly, states aching under the weight of the recession are seeking a way around that rule. Because companies such as Amazon.com Inc. get help drumming up sales from online affiliates — people who link to products on their blogs, promote Web shopping deals and offer coupons — several states say the Internet retailers should charge sales taxes in states where those affiliates are based.

The financial benefits may not be quite what the states anticipate, though. Rather than gearing up to collect taxes, Amazon and other Web retailers are simply shutting down their affiliate marketing programs. As the small businesses that participate in these programs get cut off, a state could lose tax revenue rather than add to it.

Patrick Byrne, head of Salt Lake City-based Overstock, said sales made through affiliates account for less than 10 percent of Overstock's revenue. The amount of business it will lose by cutting about 8,000 of its 25,000 affiliates loose is a "small fraction" of what it would have to start collecting in taxes if it kept the affiliates, he said.

A look at what the affiliates do helps explain why. They're just one of several methods that e-commerce companies have for driving visitors to their Web sites, so nixing them is not necessarily a big loss for the companies.

It's a far bigger deal to people such as Rich Owings.

By running Web sites such as GPSTracklog.com from his home in Asheville, N.C., Owings serves as an affiliate for Amazon and other companies. Owings, 53, spends most of his time reviewing GPS gadgets and covering industry news. He links to navigation products of his choosing on Amazon's site, and if his readers click through and buy one, he gets a commission.

Owings estimates he brought in about $80,000 in affiliate revenue from various companies in 2008, about $50,000 of which came from Amazon. After Amazon recently shuttered its North Carolina affiliate program in response to that state's attempt to collect sales taxes, Owings said he and his wife were thinking about heading elsewhere to run their business.

"We're terrified," he said. "We just bought a house here a year ago and we're looking at having to move out of state just to keep our business going."