Kevin Mardorf is preparing to leave the state and he’s taking his business with him.
The 39-year-old New Canaan resident has operated an affiliate marketing website for 10 years, but he said a legislative proposal that would require online retailers to collect a sales tax in Connecticut would destroy his company.
Through his website dealalert.com, Mardorf earns a sales commission by advertising online, products and services for out-of-state retailers.
Under the legislative proposal, retailers like Amazon.com and Overstock.com that have no physical presence in the state but enter advertising relationships with Connecticut-based websites would be required to collect a 6.25 percent sales tax from customers.
Only a handful of other states have passed a similar law, known nationally as the Amazon tax. Mardorf says the measure will lead some online retailers to stop doing business with him.
When a similar bill was proposed last year, for example, Amazon.com threatened to sever affiliated advertising relationships with Connecticut residents.
“If this bill passes I’m losing 45 to 50 percent of my income,” said Mardorf, who recently put his home up for sale. “This doesn’t make much sense. I’m going to have to leave the state.”
Connecticut’s version of the Amazon tax recently passed the finance committee and will likely garner enough votes to pass the House and Senate. Gov. Dannel P. Malloy threw his support behind the measure last week, although it wasn’t part of his original budget plan. The bill is projected to raise $9.4 million for each of the next two years to help plug the state’s massive $3.2 billion deficit.
In some ways the measure is pitting some Connecticut small businesses against each other.
Opponents of the bill include the estimated 2,800 affiliate marketers in the state, mainly one-person shops, according to Rebecca Madigan, executive director of the California-based Performance Marketing Association. About 6 percent of those online companies have five or more employees in the state, Madigan said.
That includes companies like Middletown-based Clarus Marketing Group, which is headed by Tom Caporaso.
Caporaso’s company runs FreeShipping.com, a website that includes advertising for large online retail chains including Amazon. The company has 26 employees and has added about a half dozen people in the past year. They’ve also recently moved to a larger 6,000 square-foot office, double the size of their former digs in Wethersfield.
But Caporaso said passage of the Amazon bill would have a devastating impact on his 10-year-old company and could force him to cut his workforce.
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.
In a press conference last week, Malloy cited similar concerns.
“We have given a definitive advantage to certain types of retailers and that is adversely impacting employment in a place like the state of Connecticut,” Malloy said.
Tim Phelan, president of The Connecticut Retail Merchants Association, said even if online retailers like Amazon sever their ties with Connecticut companies, there are other opportunities for affiliate marketers to seek out partnerships with brick and mortar stores like Sears or Walmart, which also have an online presence. So passage of the law wouldn’t necessarily be an automatic death knell for the industry.
“If there is competition in the marketplace it should be a level playing field for everyone,” Phelan said.
Currently, online retailers do not have to collect a sales tax if they don’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. Mardorf and many industry insiders say it won’t because if the tax passes, online retailers like Amazon.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.
“If passed, this law would wipe out my business and still not collect any new sales tax dollars because the out-of-state retailers will fire me rather than collect sales tax,” Mardorf said. “It is a simple business decision for them.”
In a statement Amazon.com said the “budget proposal unfairly targets online advertising and would be counterproductive, like similar laws in North Carolina and Rhode Island that those states are in the process of repealing because they realized no increase in revenue.”
The proposed tax is causing deep worries for 52-year-old Lisa Rohner of Wallingford who operates several affiliate marketing websites.
A freelance writer, Rohner said she makes between $500 to $2,000 a month through her affiliations with companies including Amazon.com. She said if the bill passes, she expects Amazon to sever their relationship with her.
And without that extra income, Rohner, who lost her home to foreclosure a few years ago, said she will not be able to pay her bills.
“This is a portion of income I can’t afford to lose,” said Rohner. “I’ve lost many nights sleep over it.”
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.
The issue is gaining more attention in Washington D.C. Illinois Sen. Dick Durbin is proposing a national Amazon tax as part of his proposed “Main Street Fairness Act.”
Malloy said he would also like to see the federal government act.
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