Purpose Of Bill: To require out of state Internet retailers to begin collecting sales tax on sales of merchandise to residents of Georgia.
Background: Established federal law
(upheld by U.S. Supreme Court) says that mail order, telephone, or Internet merchants do not have to collect sales taxes on purchases made by residents of any state... except those states where the merchant has a physical location (physical nexus) such as a store, call center, or warehouse.
E-Fairness Method: This legislation would expand the definition of physical location (physical nexus) to include affiliate agreements between Internet merchants and Georgia residents or businesses. Thus any Internet merchant with affiliates in Georgia would now be required to collect sales tax on purchases made by Georgia residents.
Affiliates: An affiliate is any business or individual that has a relationship with an Internet merchant, whereby that merchant agrees to pay a commission or advertising fee to the affiliate for sales that result from a purchaser having clicked a link on a website operated by the affiliate.
History:
Bills similar to this have been passed in Illinois and 7 other states. (Two states have since rescinded their legislation, while lawsuits plague the others) In all of these states, Internet merchants fired their affiliates states in order to avoid this new definition of physical nexus. We have been informed the same thing will happen in Georgia.
Result: By canceling their affiliation agreements, Internet merchants were still not required to collect sales taxes in Illinois and the other states, rendering the bills meaningless.
Georgia Affiliates: There are an estimated 6,000 fulltime Georgia based affiliates... businesses and individuals, plus more part-time affiliates. It is estimated that Georgia affiliates earned approximately $483 million in commissions in 2010 and paid $29 million in Georgia income taxes.
Loss To Georgia: Just like in Illinois and the other states, most of the Georgia based affiliates will shut down, while the larger ones will be forced to relocate to neighboring states. This will result in Georgia losing income tax revenues from the profits and wages of these affiliates and their employees. Plus that $483 million in lost annual affiliate income will not circulate through Georgia's economy, negatively impacting Georgia based suppliers and merchants, and also reducing state and local sales tax collections.
Alternatives: Amazon.com and most of the other major Internet merchants are working on a national plan that would provide a simplified system of collecting sales taxes across hundreds of individual tax jurisdictions. About two-dozen states have joined this effort. It is estimated that it will take about 18 to 24 months to finalize this plan.
Analysis: By passing this legislation, Georgia will still
not be able to force Internet merchants to collect sales tax on purchases made by Georgia residents... and will instead harm the state's economy by forcing thousands of Georgia businesses to shut down. As an alternative, Georgia should join the national effort, thus preserving Georgia based affiliates, and within a couple of years begin to receive sales tax collections on Internet purchases... raising needed state and local revenues... and providing a level playing field for Georgia brick and mortar merchants.
Other Facts and Considerations On Georgia's e-Fairness Proposal
Money Sources:
The population of Georgia is just under 10 million, while the U.S. population is just over 300 million... meaning Georgia's share of the national population is about 3%. Of the roughly $483 million in annual commissions (advertising fees) received by Georgia based affiliates... only about 3% (or $29 million) of that is generated through purchases made by Georgia residents. The other 97% or $454 million is coming from purchases made by people in other states. That is a net inflow of $454 million coming annually into the state of Georgia.
Other Outlets:
If Amazon.com were to buy advertising in a newspaper, or on a radio or TV station located in Georgia, no one would take that to mean that Amazon now has a physical location in the state. So why would having an Amazon ad or link on a website owned by an individual or business in Georgia be considered to mean that Amazon has a physical location in Georgia?
In my case, my web sites are actually hosted on servers in the state of Washington. That is a real stretch to say that constitutes a physical nexus in GA.
Commissions:
What are classified by many as affiliate commissions, are really pay for performance advertising fees. This method of paying for advertising is very common in the Internet industry, but can also be found occasionally in TV and radio.
Example: A radio or television outlet may have unsold inventory... spots available for ads but no paid ads to run. The radio station or television channel may give that unused airtime for free to an infomercial company. In return, when someone purchases the infomercial product, the stations get a commission or pay for performance advertising fee. That is why the same infomercial uses a different telephone number on each station/channel... so they can track which outlet generated the sale.
Website owners place banner ads or links to Amazon.com and other Internet merchants... if someone makes a purchase as a result of that ad/link, then the website owner gets a pay for performance ad fee.
Misconceptions:
While there are bloggers who may sell a few books through links on their blog sites, the Internet affiliate industry is much more than that. There are in excess of 100,000 Internet retailers in America and several thousand of those have affiliate programs.
Some fulltime Georgia affiliates are small mom and pop businesses, retirees, or stay at home moms, while others employ dozens and in some cases hundreds of people. If you've ever used a shopping comparison site like Price Grabber you have used a major affiliate.
Do we in Georgia want to tell web developers and other tech industry professionals
they are not welcome here? When Georgia affiliates are shut down, affiliates in other states will step up to fill those holes. They win... Georgia loses.
