Tom Caporaso wasn’t surprised to hear state officials admit last week that Connecticut will be collecting little to no revenue in the next few years from its newly enacted Amazon tax.
As a chief opponent of the measure, he argued as much.
But being right isn’t much of a consolation prize for Caporaso’s small business Clarus Marketing Group, which has lost a chuck of its business because of the new law that requires retailers that have no physical presence in the state but enter advertising relationships with Connecticut-based websites to collect a 6.35 percent sales tax from customers.
Caporaso’s company runs FreeShipping.com, a website that earns a sales commission by advertising online the products and services of out-of-state retailers.
After Connecticut’s new law kicked in earlier this year about 100 retailers — including big time names like Amazon and Overstock — terminated their contract with FreeShipping.com so that they can dodge the tax, forcing Middletown-based Clarus Marketing Group to lose an undisclosed portion of its revenue.
“We are definitely feeling the impact,” Caporaso said. “It’s frustrating to say the least because the exact roadmap that we laid out there is happening.”
Caporaso’s company is not alone.
In the wake of the passage of Connecticut’s so-called Amazon tax, about 900 out-of-state retailers have stopped advertising with Connecticut-based web sites, costing the 3,000 or so affiliate marketers in the state about 25 to 35 percent of their annual revenue, according to Rebecca Madigan, executive director of the California-based Performance Marketing Association.
Madigan, whose trade group represents the industry, said the new law has forced some affiliate marketers in Connecticut, which include mostly small shops, to lay off workers, move out of state or shut down their business altogether.
“It has had a significant impact,” Madigan said.
The Amazon tax has been a hotly contested issue in Connecticut and across the country. The legal fight over whether or not online retailers can collect a sales tax in states where they don’t have a physical presence, has deeply divided those on all sides of the issue.
And now Congress is stepping in to try to come up with a federal answer to the problem.
Currently, online retailers do not have to collect a sales tax in states where they don’t have a “nexus,” or physical presence. That precedent was established in a 1992 Supreme Court case. Recently, however, states have been looking for ways to bypass that ruling as they desperately search for new revenue sources to plug budget shortfalls.
In recent years, several states adopted laws similar to the one Connecticut recently passed, arguing that affiliate marketers act as a sales force for the retailers, therefore giving the retailers a physical presence in their state.
Proponents of the sales tax include brick and mortar retailers, which say it is a matter of fairness to make online purchases collect the same sales tax on-site shoppers pay.
One of the key questions surrounding the tax, however, is whether or not it would actually raise revenue. The affiliate marketing industry argued that it would not because online retailers would just sever their relationship with affiliate marketers in Connecticut, allowing retailers to bypass the collection of a sales tax.
Last week Department of Revenue Services Commissioner Kevin Sullivan said the state would collect little to none of the $9.4 million in revenue that was projected to come into the state’s coffers as a result of the tax.
Sullivan also said Connecticut is backing down from its pledge to collect sales taxes from Amazon in particular because the online retailer is now supporting federal efforts to address the issue.
Sullivan did pledge, however, to go after other online retailers like eBay and Overstock.com.
Caporaso of Clarus Marketing Group said the issue would be better handled on the federal level, because state-by-state regulations put companies like his at a competitive disadvantage.
And now the issue is gaining more attention in Washington D.C. with several measures being debated. Illinois Sen. Dick Durbin, for example, is proposing a national Amazon tax as part of his proposed “Main Street Fairness Act.”
Gov. Dannel P. Malloy, who supported Connecticut’s Amazon tax, said he would also like to see the federal government act.
Malloy, in an interview, said he still supports Connecticut’s law because the system that existed previously put larger brick-and-mortar retailers, which employ a significant number of people in the state, at a competitive disadvantage.
But Malloy said he is optimistic that a federal solution could be hatched.
Until that happens, however, affiliate marketers in Connecticut are likely in for a tough slog, said Madigan of the Performance Marketing Association.
Madigan said no online retailers, including Amazon, will likely re-establish contracts with affiliate marketers in Connecticut unless there is a federal solution or the state repeals its law.
There doesn’t appear to be support for the latter scenario.
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