A legislative proposal that would require online retailers to collect a sales tax in Connecticut is pitting some Connecticut small businesses against each other, and has led one major online retailer to threaten to sever its advertising ties with companies in the state.
Under the proposal, which recently passed the finance committee, out-of-state online retailers, like Amzaon.com and Overstock.com, that enter into advertising relationships with Connecticut-based websites would be required to collect a 6 percent sales tax from customers.
Opponents of the bill include Connecticut companies known as marketing affiliates, which earn a sales commission by advertising online, products and services for out-of-state retailers.
Local marketing affiliates say the law would destroy their companies because it would lead online retailers to stop doing business with them.
Amazon.com has already threatened to sever affiliated advertising relationships with Connecticut residents, if the bill passes.
There are 2,800 marketing affiliates in the state. “The way the legislature is going about this and using us as the middleman doesn’t make sense,” said Tom Caporaso, the president and chief operating officer of Wethersfield-based Clarus Marketing Group.
Caporaso’s company runs FreeShipping.com, a website that includes advertising for large online retail chains including Amazon. The company receives a commission any time shoppers click an ad on their website and then purchase a product or service from the retail outlet.
Caporaso said the bill would have a devastating impact on his nine-year-old company, which has experienced recent growth and employs about 20 people.
Proponents of the sales tax include some brick and mortar retailers, which say it is a matter of fairness to make online purchases subject to the same 6 percent sales tax on-site shoppers pay.
Suzanne Staubach, a trade manager at the UConn Co-Op in Storrs, the bookstore that serves the University of Connecticut and local community, supports the bill because she said it’s difficult for local merchants to compete with out-of-state online retailers.
She said too often today’s readers opt to shop online where sales tax is not collected.
“This gives out-of-state online retailers a huge advantage over us and other Connecticut businesses,” Staubach said.
Lawmakers supporting the measure say it will help raise revenue to plug a looming $3 billion budget deficit.
Currently, online retailers do not have to collect a sales tax if they don’t have a “nexus,” or physical presence there. That precedent was established in a 1992 Supreme Court case. Recently, however, states have been looking for ways to bypass that law, as they desperately search for new revenue sources to plug budget shortfalls.
In the past two years New York, Rhode Island, and North Carolina passed similar laws to the one Connecticut is considering, arguing that marketing affiliates 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 by 2012.
Amazon is challenging the New York law in court, and has ended its ad relationships with companies in the other two states.
North Carolina and Rhode Island, according to Paul Misener, vice president of global public policy for Amazon.com.
Misener said the proposal Connecticut is considering is unconstitutional and would produce little or no revenue for the state.
There are about 2,800 marketing affiliates in Connecticut and nearly 200,000 across the United States, according to the Performance Marketing Association.
Instead of passing this bill, Rebecca Madigan, executive director of the California-based trade association, said Connecticut lawmakers should join a multisite pact that aims to streamline and simplify the tax code across the United States. She said one of the biggest reasons online retailers oppose local sales taxes is because the United States has more than 7,600 taxing jurisdictions, each with its own rates and definitions of taxable items.
“To face a tax from each of those jurisdictions would be too costly and burdensome,” Madigan said. If companies knew there was one, consistent sales tax rate across the United States, however, they’d be more willing to pay it, she said.
He said if the bill passes, Amazon and presumably dozens of other out-of-state retailers would terminate their relationships with companies like his, taking away a big chunk of the local companies’ revenue stream.
“This inequity is hurting the UConn Co-op and hurting other Connecticut retailers.”
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