States have been trying for years to find ways to collect taxes from online sales, which continue to grow at a rate of about 10 percent a year. States are now losing out on $20 billion annually in taxes they would be collecting if all online sales were happening in physical stores. The Illinois Department of Revenue estimates that they could collect $153 million per year with an online sales tax as proposed in Senate Bill 3353.
In 1992, the Supreme Court ruled that states could not force retailers to collect sales taxes unless they had “nexus” — a physical presence in a given state. That doesn’t apply to operations such as Amazon that don’t run physical stores and do all their business online.
What does this mean?
There are approximately 8,940 affiliates in Illinois representing 4.47% of all US affiliates. In 2008 Illinois affiliate marketers earned $78.6MM and paid $2.35MM in state income taxes. As an active member of the affiliate marketing community, we strongly oppose any state legislation that would attempt to use affiliates to establish nexus for out-of state merchants.
We depend on our relationships with many out-of-state merchants as a large part of our company’s revenue. “Affiliate Marketing is an Internet-based marketing practice in which a business rewards one or more affiliates for each visitor or customer brought about by the affiliate’s marketing efforts.” (Wikipedia) We are not an employee of any of these companies. We do not collect any money. We do not make the transaction. And we do not ship any goods. We simply advertise these offers to consumers on behalf of the merchants.
This type of business model does not meet the definition of nexus. If bills like this pass in Illinois, many retailers will terminate their relationship with affiliate marketers and we will lose a large percentage of our revenue. This new law will impact the amount of staff we hire, the amount of income taxes we pay to the state and our impact in the community.
In fact, a handful of states that have passed legislation of this type (such as Rhode Island) have publically admitted that the state’s legislation never realized the projected revenue and have lost many small businesses in the process. California Governor vetoed a similar bill, once realizing the millions in lost income tax revenue.
New York was the first state to create a advertising tax, which was supposed to generate $100 million in yearly revenue. However, these elected officials had not taken the following ramifications under consideration:
New York Affiliates were Terminated: Almost every merchant that this new law effected, terminated the agreements with the affiliate marketers they were working with in New York to avoid collecting and paying the associated taxes.
Loss of Income: The subsequent effects on the New York advertisers whose services were no longer needed by the merchants; including but not limited to associated decreases in income tax payments and filing for Federal and State unemployment benefits.
Three years have passed and additional states have blindly followed in New York’s footsteps without any analysis of the effect that Advertising Tax has had on New York State small businesses.
I want the affiliate marketing space to continue to thrive and grow. These types of laws will put small businesses, like ours, out of business.
We urge you to show your support by contacting the following committee members and your elected representative in the Illinois Senate. You can also download a spreadsheet of all the Illinois Senate members with their phone number, email, Facebook and Twitter username if available.