The fallout from Connecticut’s passage of the controversial Amazon tax has begun.
Overstock.com said Tuesday that it has cancelled its ad contracts with affiliate marketers in Connecticut, as a result of a new tax state lawmakers passed as part of the two-year budget agreement.
Under the law, retailers like Amazon.com and Overstock.com that have no physical presence in the state but enter advertising relationships with Connecticut-based websites will be required to collect a 6.35 percent sales tax from customers.
Only a handful of other states have passed a similar law, known nationally as the Amazon tax. Affiliate marketers in the state warned that the measure will lead some online retailers to stop doing business with them. That is the case with Overstock.com.
A company spokesman said ad contracts with affiliate marketers in Connecticut will expire June 1.
It’s not clear if any other online retailers have severed their relationship with Connecticut companies at this point.
A call for comment to Amazon.com was not immediately returned.
“It is unconstitutional for a state to pass a law making out-of-state retailers collect sales tax simply for having business relations with marketing affiliates in those states,” said Overstock.com CEO Patrick Byrne in a written statement. “So we have severed relationships with all of our affiliates in Connecticut, and have taken the money we would normally pay those affiliates, and are using it to reward our best customers in those states.”
Overstock.com said it “has long opposed state laws designed to force out-of-state retailers to collect sales tax merely for using in-state ad services. The company has mounted court challenges, citing Supreme Court decisions rendering these laws unconstitutional, and has now cut ties with local advertisers in RI, NY, NC, AK, IL and CT.”
As part of its plan to sever relationships with Connecticut affiliate marketers, Overstock.com is also providing new incentives for customers.
 Any customer in Connecticut, for example, that has spent more than $300 in the past year will receive a free Club O membership and their membership account will come preloaded with an additional $10 balance.
Before the passage of Connecticut’s new law, online retailers did not have to collect a sales tax if they didn’t have a “nexus,” or physical presence in the state. 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.
Online retailers that do have a physical presence in the state will often collect a sales tax from an online transaction. And Connecticut residents are also required by law to pay a sales tax if they buy goods out-of-state, but that provision is typically not enforced.
In the past several years New York, Rhode Island, and North Carolina passed similar laws to the one Connecticut is considering, arguing that affiliate marketers act as a sales force for the retailers, therefore giving the retailers a physical presence in their state and a way to tap into a potential revenue stream that could reach $11 billion next year.
Illinois and Arkansas have similar laws.
Amazon is challenging the New York law in court, and has ended its ad relationships with companies in the two other states.
One of the key questions surrounding the controversial tax is whether or not it will actually raise revenue for the state. Many industry insiders say it won’t because if the tax passes, online retailers like Overstock.com will just sever their relationship with affiliate marketers in Connecticut, like they’ve done in other states.
If that happens, the online retailers without a brick-and-mortar presence in the state would no longer have a legal “nexus” in Connecticut, allowing them to bypass the collection of a sales tax.
In its assessment of the bill, the nonpartisan Office of Fiscal Analysis said the measure would raise $9.4 million a year, but only if online retailers don’t terminate their affiliate agreements in the state.
