Archive for July, 2009

I recently read this article on Yahoo that talked about how states are going after companies with affiliates in their states for tax revenue. This seems pretty stupid, as in killing the “Golden Goose.”

The Internet is responsible for the creation of a great amount of wealth over the years. Granted, it is also responsible for the elimination of many businesses as well. This is how “creative destruction” works in our economy. New ideas and progress make people rich while old ideas die and go away.

If only this were true of the government though. Every year it just gets bigger and bigger. It looks for more ways to generate income to satisfy its insatiable appetite. In lean times, it resorts to stupid ideas like this one. It changes, many times for the worse, how the economic game of progress is played. Governments do well when the economy is doing well. They should do everything they can to help the companies within their borders to succeed. Instead, this looks like a destructive way to fill a budget gap. I fear that this is going to kill eCommerce as we know it.

Currently a great number of people make money sharing their expertise on the Internet. They get paid by promoting good products and warning us about bad ones. They inform us of ways to better our lives, and in return we purchase the products they recommend and they get paid by those selling the products. This is no different than sending a letter through the mail to a friend saying the new car they bought is incredible and that they should get one. Just because a company is willing to pay a finders fee doesn’t mean it has hired a person to do any work. It is rewarding the efforts of people to share information about products. This is advertising at its core and has been the basis of our economy for other 100 years. Companies pay millions to get the word out using advertising agencies. Does this mean that they now have a business interest in the state where the the ad agency resides? Most decidedly not.

Companies like Amazon agree to pay someone for help in selling a product. It is strictly advertising revenue, and they have no business interest in any state except where they have a physical presense. Saying otherwise means that every business has a business interest in every state. Any company wants to sell its products and doesn’t necessarily care whether what state the customer lives in.

If I recommend to a relative some service and I get a discount as a result, does that mean the company now has a business interest in my state? That kind of logic just boggles the mind. I was not hired by the company to do anything. I was encouraged to share information and for that they are most grateful when a sale occurs. To encourage this sharing of information, they offer an incentive. It is just that simple. Affiliate programs are just the same except that people have made a business out of it. If they are a business, then they must pay taxes where they live. That is how the system works and that still doesn’t mean that the seller of a product has a business interest there. Only that the person creating the link and posting information has a business interest. It is they who should be paying income taxes on the money they collect. But they didn’t sell a product. They didn’t handle any money. They didn’t do any activity that would connect them with the seller other than mentioning where a product may be bought.

For decades traditional companies have sold items across state lines. The products were shipped to other states and no sales tax was collected. There was no legal right to it because the purchase was from a company in another state and so no tax was collected. Internet companies operate the same way except that with the Internet, it is now easier to find their products and make a purchase. Lots of technologies have converged to help make this simplicity a reality. Now the states are rushing in and crying foul. They want to collect taxes on sales to which they are not entitled.

Companies are not stupid and the best will survive. If they find it cheaper to shut down an affiliate program than to continue one, then standard business practice demands that it be shut down. The states have essentially pushed a logical decision in response to their illogical argument. It should be no surprise that the small business will suffer as a result.

I find it despicable that a state would even consider pursuing such a course. They stand to loose a great deal. Many small companies will shut their doors since their income has been cut off. Millions in taxes collected from these business and their workers will disappear. In its place will be people filing for unemployment benefits along with all the other welfare handouts the government has to offer. States should spend their time trying to figure out how to get people back to work. They should try to educate workers, helping them train for the jobs in demand today. Instead, they seem determined to look for the quick path to cash as a means to solve their problems. This is destined to end in failure bodes ill for the country. Millions of jobs have already been lost. Let’s stop looking for ways to eliminate even more jobs.