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Connecticut Internet Sales Tax Hurts Affiliate Marketers

What is the new Connecticut Internet Sales Tax supposed to do?

Connecticut has recently passed a bill which requires internet retailers to charge a sales tax on all goods sold in Connecticut if the internet retailer has a physical presence in the state.

Connecticut lawmakers considered the law necessary to hold Amazon.com and other online retailers accountable like all other businesses in the state. Lawmakers argue that it is not fair for Connecticut based ‘brick and mortar’ business to be subject to the state’s sales tax while Amazon.com is not. Aside from raising funds for the state in this time of economic uncertainty, the bill was also designed to protect Connecticut business from being unfairly outsold by online retailers not subject to the same tax laws.

Why did Amazon.com pull out of Connecticut?

The United States Supreme Court has ruled that a state can only tax an entity if that entity has some kind of a physical presence in the state. Regardless of whether Amazon.com has an actual physical ‘brick and mortar’ presence in Connecticut, the Connecticut legislature’s bill considers Connecticut-based bloggers and other internet content providers who advertise for Amazon.com a sufficient physical presence to subject Amazon.com to the tax. These bloggers and others or ‘affiliates’ advertise for Amazon.com because they receive a portion of the revenue generated by users accessing Amazon through their site.

After the new Connecticut Internet Sales Tax was passed, Amazon.com decided that it would rather give up on Connecticut based affiliates than be forced to pay Connecticut’s sales tax. In its economic calculation, Amazon probably found it more profitable to continue selling goods in Connecticut without having to pay the tax, than it would have been to continue advertising with Connecticut-based affiliates, while being subject on all sales to Connecticut’s new tax.

What effect will the Connecticut Internet Sales Tax have on Connecticut and on Amazon.com?

The immediate effect of the Connecticut Internet Sales Tax has been both a loss to Amazon.com and a loss to the Connecticut based affiliates that had previously generated income from Amazon’s advertisements on their websites. Amazon.com suffers to some extent because it can no longer advertise on the popular Connecticut blogs and websites it on which it had previously been an active advertiser.

To the Connecticut based affiliates, the Connecticut Internet Sales Tax will be perhaps even more traumatic. Not only is Amazon.com prevented from advertising on Connecticut based websites, but other online retailers might also fear subjugation to the Connecticut Internet Sales Tax, and avoid placing any advertisements on Connecticut affiliates websites. Perhaps the law is fair in the long run, as it prevents online retailers from having an unfair advantage, but in the short term, the Connecticut Internet Sales Tax cannot be said to be popular with either online retailers or the Connecticut-based affiliates that were once dependent on them.

Mike Young, Esq.

Author Mike Young, Esq.

Mike Young has been practicing business and technology law since 1994 and is an angel investor in startups. He's been an entrepreneur since 1988. To get legal help from Attorney Young, click here now or call 214-546-4247 to schedule a phone consultation.

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