State of confusion Proposed changes to N.C. law threaten Web-based businesses

By the time you read this, I may be out of business, thanks to the North Carolina General Assembly. In an attempt to fill a giant revenue hole, our legislators turned to what they thought was easy money: taxing Internet sales. Unfortunately, they don't really understand how Web commerce works. But I'm getting ahead of myself; read on and you may soon know more than your elected representatives apparently do …

Actually, this isn't a new tax. You're supposed to note online purchases on your state income-tax form and pay the sales tax then. But few people do; hence the incentive for the Legislature to go after those potential tax revenues. And while it's not technically a new tax, the reality is that it would mean more money going out of your pocket and into government coffers.

As you might expect, e-commerce giants such as Amazon have a different take on this. They don't want to have to track sales-tax rates in 50 states and hundreds of municipalities; nor do they want to subject themselves to audits by so many different jurisdictions.

In between these two camps are what are called "affiliates." That's folks like me who have Web sites that link to Amazon and other e-tailers. My site (http://gpstracklog.com) reviews GPS units, covers industry news and offers tips about using these devices. When someone visits an online merchant via a link from my site and makes a purchase, I collect a small percentage of the sales price. It's hardly a get-rich-quick scheme, but I've built it up into a full-time gig. Lest you think it's easy money, I've been at it for four years, and there are times when I work 80 hours a week. But hey, I like what I do.

Here's the rub: Amazon doesn't have to charge sales tax in states where the company doesn't have a physical presence. But the state Legislature wants to define an "affiliate" relationship as a physical presence equivalent to a storefront or warehouse. And because I link to Amazon, that means me. Creative, huh? The law calls this situation "nexus" — basically, a tie that binds.

Anticipating the change, Amazon cut off all its affiliates in North Carolina on June 26; other e-tailers soon followed. In other words, no more nexus — and now they don't have to collect N.C. sales tax, period. Oh, wait: That means Web site owners like me no longer get paid. And did I mention that I do this full time, depend on the revenue, have a family and don't want to become homeless?

I've come across all sorts of people who'll be affected — like the mom who must stay home to care for her mentally handicapped son. Or the woman who uses the extra income to pay for her aging parents' prescription medicines. Affiliate marketing enables these folks to meet their needs.

The legislators, of course, believe they're being blackmailed by this move. But Amazon and many other e-commerce companies are not opposed to taxing online purchases. As a matter of fact, they support the Streamlined Sales Tax Project, a collaborative effort by 44 states to pave the way for equitably taxing online purchases.

According to the state legislators I've spoken to, however, implementing this will require an act of Congress. The Supreme Court cleared the way for that in Quill v. North Dakota (1992). North Carolina, in fact, is a full member of the sales-tax project, but they've apparently gotten tired of waiting for Congress to act. And my guess is that Congress doesn't really want to pass an Internet-tax law. Talk about unpopular! Can you blame them?

Meanwhile, if the changes in North Carolina law are approved as part of the Appropriations Act of 2009 (Senate Bill 202, now in conference committee), the only way I'll be able to keep my company going is by moving out of state, which I don't want to do. It wouldn't be so bad if I thought this was something our duly elected representatives had carefully considered, but it's become increasingly clear that many of them don't really understand it.

They keep asking me to explain what I do for a living. One state legislator from Buncombe County kept referring to me as an Amazon employee. And the governor seems to think that Amazon's recent move to sever affiliate relations prevents the company from doing business here. (Hint: Try buying something from Amazon Bev; it still works). Oh, and did I mention the $46 million tax break North Carolina is giving Apple — while driving homegrown businesses out of state?

Ironically, with e-tailers cutting off the owners of N.C.-based Web sites, the state not only won't be able to collect sales tax from those vendors, it will also lose the income-tax revenues that the owners of the affiliate Web sites have been paying. Given all of that, you'd think the General Assembly would already have pulled the proposed legislation. Unfortunately, "legislative logic" appears to be an oxymoron.
To fight this law, call your state legislators and tell them you're opposed to the Internet tax provisions in S202.

[Rich Owings is a professional blogger who hopes to continue living and working in Asheville.]

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5 thoughts on “State of confusion Proposed changes to N.C. law threaten Web-based businesses

  1. Keith Yockey

    Thanks for the blog Rich. Your experience with the clueless legislators is an eye opener.
    Names? Phone numbers? email addresses? Your readers would like this information.

    My solution to this Sales Tax mess is for NC (and other States) to enforce existing Use Tax law. Make it mandatory rather than voluntary as it is now. This is a responsibility of the consumer, not the retailer. The State could force the credit card companies (Merchant Accounts) to collect the tax and remit directly to the State (States pay related fees) more detailes here: http://www.thedumbdog.com/blog/?p=69

    The proposed legislation in Congress involving SST will cause bigger headaches than you can imagine. Streamlined? Hardly. Internet sellers will still have to collect and remit sales tax returns for 45 States, as well as over 8000 tax districts that are not defined by zip code. Yes there are software companies who offer a tax collection service, but at $30-$50 / mo. it is an added expense most businesses can’t afford, including the extra hours involved collecting the data.

    It is far easier to allow the card processors to collect and remit tax directly to the State(s) The processors can absorb the cost a lot easier than the sellers, and I’m sure the State DOR would gladly help out.

    Then again, as you have pointed out in this blog, the legislators are so clueless as to how etail works, even explianing a simple plan like this one would be hopeless.

  2. Small Business Owner

    May I just point out how incredibly unfair it is that small business owners with brick and mortar stores have no choice but to collect sales tax from customers, while Amazon and the like have been able to get away without doing it for years.

    Do you have any idea how many sales we lose because we can’t offer (for all practical purposes) tax-free sales? Either all retailers should be responsible for collecting sales tax or none of us should be responsible. But it is not fair to make some of us collect tax while others get out of it. And I’ll wager that the small brick and mortar businesses adversely affected by this unfairness do much more to support the local and state economy (in job creation, etc.) than professional affiliates.

  3. Keith Yockey

    @ small business owner
    I have blogged about the advantages/disadvantages a B&M has.
    http://www.thedumbdog.com/blog/?p=69
    ~ The B&M does not have the same tax load on a community that an online retailer has. The B&M needs Police/Fire/Sanitation services that require a lot more tax funding to support. Why should the etailer have to offset your tax expense?
    ~ You can’t touch or feel a product online. email questions can take days to answer. Not so with a B&M. Advantage: B&M
    ~ What Law or Rule prevents the B&M from selling online? Advantage: Draw
    ~ For In-State sales, both the B&M and Online Sellers collect and remit Sales Tax.
    ~ A B&M does not charge separate shipping charges, for that Lazy-Boy chair, that could be $100 or more for shipping. Advantage: ???
    ~ Shopping online is greener. No travel, no gas consumed, no waiting in line. Shouldn’t that deserve a tax advantage for helping to save the planet?

    My plan makes the playing field equal, and the States collect the lawful Use Tax. It even works for buyers who travel out of State to purchase merchandise (supposedly to save on Sales Tax) This would correct the problems of the ‘law breakers’

    I stand firmly against collecting out of State sales tax. Worse would be letting legislators write new law that destroys States’ Rights and places small businesses like mine in jeopardy of going out of business.

  4. AshevilleObserver

    A small correction to Mr.Yockey’s comment, “Shopping online is greener. No travel, no gas consumed . . .”
    The item ordered online has to be delivered by UPS, FedEx, etc., so gas is consumed.
    Online shopping is just a higher-tech version of the old Sears Catalog shopping.

  5. Keith Yockey

    @ Asheville Observer
    Certainly delivery carriers use gas (diesel). It is a fraction of what the typical household member would use to buy an item from a B&M. UPS & USPS would be considered Greener. Until ‘Star Trek’ transporters are availble, this is the next best thing.

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