North Carolina Tax Plan Strangling Some Small Businesses

This is the second time that I’ve written about the North Carolina proposed budget which, in it’s current form, would expand the concept of business nexus to include those companies that have one or more affiliates within the state. Since the last time I wrote I have had a 13 year business relationship with Amazon.com terminated by Amazon out of their opposition to this initiative and through NO action of my own. I’m also finding out that textbooks.com has similarly terminated North Carolina affiliates. I doubt these will be the only two. I am writing here today out of frustration. In the last two weeks I have contacted my State Senator for the first time in my life over this issue because it directly affects me and my ability to earn a livelihood. I have heard NO response from my state Senator Martin Nesbitt. On that count I am disappointed to not receive at the very least a “thank you for contacting us” form response. I have become aware thought that my State Senator is not the only politician that seems to be ignoring input on this matter.
Last night in the forums at ABestweb.com the following was posted with regards to Senator Clodfelter:
Here’s how much Senator Clodfelter cares what the people of North Carolina think:
_____________________________________________From: Wanda Joyner (Sen. Clodfelter) [mailto:Clodfelterla@ncleg.net]Sent: Monday, June 29, 2009 1:24 PMTo: DDSubject: Not read: REASONS WHY SECTION 27C.2 FROM SB 202 SHOULD NOT PASS
Your message
To: Sen. Daniel ClodfelterSubject: REASONS WHY SECTION 27C.2 FROM SB 202 SHOULD NOT PASSSent: Fri, 26 Jun 2009 19:17:55 -0400
was deleted without being read on Mon, 29 Jun 2009 13:24:04 -0400
This is the digital equivalent of “stuff it” the way I see it. His mind is already made up.
More disturbing to me is the quote from our Governor Bev Perdue at the end of this video interview…. She essentially says… “I would be very surprised at the end of the day if any of any of the major distributors that do it in a clickthrough technology kind of format, refuse to sell to people in the state that’s going to be the seventh largest in America.” Yes…. well…. either she is misrepresenting what this law will do or has no clue as to what all the fuss is about. Amazon is not talking about NOT SELLING to North Carolina, the tax clearly says that if they reward people in the state of North Carolina with a commission for referring sales they will have to collect sales tax on those purchases, so…. Amazon is dropping it’s financial reward to residents for referring sales. Amazon will still sell to people in the state of North Carolina, they will just avoid that little bit about having to collect the Sales tax.
I have 13 years worth of links distributed among many sites that promote products at amazon. I no longer will receive any compensation for those 13 years of work thanks to this initiative. The state will lose out on the affiliate revenue that has made up to 20% of my yearly income. It was taxable income and has been reported every year. The state is losing out on this in their attempt to pin down any source of income they can.
It’s not about Amazon not selling to us. I suspect that Amazon is rather eager to see the “up to 15%” that it paid to affiliates in their own coffers…. Not only will they not be collecting the state tax, their profit margin has just gone up a bit. Now, there are other affiliate programs out there, but for your reading enjoyment (?!) I will include the text in question from the proposed budget….
SECTION 27C.2.(b) The catch line of G.S. 105-164.8 reads as rewritten:“§ 105-164.8. Retailer’s obligation to collect tax; mail order remote sales subject to tax.”SECTION 27C.2.(c) G.S. 105-164.8(b) reads as rewritten:“(b) Mail Order Remote Sales. – A retailer who makes a mail order remote sale isengaged in business in this State and is subject to the tax levied under this Article if at least oneof the following conditions is met:(1) The retailer is a corporation engaged in business under the laws of this Stateor a person domiciled in, a resident of, or a citizen of, this State.(2) The retailer maintains retail establishments or offices in this State, whetherthe mail order remote sales thus subject to taxation by this State result fromor are related in any other way to the activities of such the establishments oroffices.(3) The retailer has representatives in this State who solicit business or transactbusiness on behalf of the retailer, solicits or transacts business in this Stateby employees, independent contractors, agents, or other representativeswhether the mail order remote sales thus subject to taxation by this Stateresult from or are related in any other way to such the solicitation ortransaction of business. A retailer is presumed to be soliciting or transactingbusiness by an independent contractor, agent, or other representative if theretailer enters into an agreement with a resident of this State under which theresident, for a commission or other consideration, directly or indirectly referspotential customers, whether by a link on an Internet Web site or otherwise,to the retailer, if the cumulative gross receipts from sales by the retailer topurchasers in this State who are referred to the retailer by all residents withthis type of agreement with the retailer is in excess of ten thousand dollars($10,000) during the preceding four quarterly periods. This presumptionmay be rebutted by proof that the resident with whom the retailer has anagreement did not engage in any solicitation in the State on behalf of theseller that would satisfy the nexus requirement of the United StatesConstitution during the four quarterly periods in question.(4) Repealed by Session Laws 1991, c. 45, s. 16.(5) The retailer, by purposefully or systematically exploiting the marketprovided by this State by any media-assisted, media-facilitated, ormedia-solicited means, including direct mail advertising, distribution ofcatalogs, computer-assisted shopping, television, radio or other electronicmedia, telephone solicitation, magazine or newspaper advertisements, orother media, creates nexus with this State.(6) Through compact or reciprocity with another jurisdiction of the UnitedStates, that jurisdiction uses its taxing power and its jurisdiction over theretailer in support of this State’s taxing power.(7) The retailer consents, expressly or by implication, to the imposition of thetax imposed by this Article. For purposes of this subdivision, evidence that aretailer engaged in the activity described in subdivision (5) shall be is primafacie evidence that the retailer consents to the imposition of the tax imposedby this Article.(8) The retailer is a holder of a wine shipper permit issued by the ABCCommission pursuant to G.S. 18B-1001.1.”
The above text (including strikethroughs) reflects the currently available release of the bill from ncleg.net (pages 268/269).
Section 3 above is the main sticking point “A retailer is presumed to be soliciting or transactingbusiness by an independent contractor, agent, or other representative if theretailer enters into an agreement with a resident of this State under which theresident, for a commission or other consideration, directly or indirectly referspotential customers, whether by a link on an Internet Web site or otherwise,to the retailer, if the cumulative gross receipts from sales by the retailer topurchasers in this State who are referred to the retailer by all residents withthis type of agreement with the retailer is in excess of ten thousand dollars($10,000) during the preceding four quarterly periods.”
Can you tell me what kind of advertising deal would NOT be covered by this? for commission or other consideration – directly or indirectly refers potential customers by link on a web site (sorry… internet web site) to the retailer…. okay Google – people now advertising through adwords will need to know whether the site the ad displayed upon was run by a North Carolina member of adsense… that’s an indirect referral through a link on an “internet web site” isn’t it? IN fact any advertising on a site owned by a North Carolina would be subject to it IF the total yearly gross receipts from state residents and referred through state residents amounted to more than $10,000….
I think you’re beginning to see why many affiliate programs would rather just pull the plug than have to sort through this nonsense.
Affiliate related income has been a quickly growing portion of my yearly income. As much as 20% in this last year. I did have plans that it would become the majority of my flow of income. However, it appears as though, if this passes, in order to do that I will have to consider leaving a state that I was born in. Leaving a state that my family has called home for around 200 years or more. As my Meniere’s Disease acts up endangering my ability to do my OTHER jobs I had put quite a bit of hope in my abilities to develop multiple streams of online income to supplement and fill the gaps of what I, at times, am just unable to do anymore. The state of North Carolina in it’s great (and frankly making up for years of mismanaged budgets) is about to put an end to that for me.
I have signed the Petition against this section of the proposed budget and encourage you to find your representation’s contact information at the General Assembly. They are currently in negotiations between the Senate and House to compromise on the budget. The Senate version of bill 202 is what was presented above. I don’t think the text exists in the House version. As I understand it, there were about 9 votes that needed to be swayed to remove the affiliate tax. Frankly though from what I’ve seen, I’m not overly optimistic. From Senators deleting messages on the topic unread and simply not responding, to a Governor that seems to have NO CLUE as to what the issue at hand is….. it looks as though they will go along with the “Projection” of it bringing in 12-18 million in extra revenue for the state and let the chips (North Carolina Affiliates) fall where they may.
What’s really frustrating about this (as if there isn’t enough) is that it seems that Barnes and Noble may be lobbying for this (seeing the pain it would cause Amazon…) Amazon is lobbying against. In the final sum the only people that will come out the losers are the citizens of the state with fewer options for earning either an honest living or simply enough to cover their webhosting fees, or an extra dinner out once a month. Some use affiliate revenue for their entire income and North Carolina seems content to shut such small businesses down without batting an eye.
Thanks for nothing Raleigh.
I have made this post take up the full frontpage on purpose. I want all that can to see what our state government is doing. I assure you that if you are in the United States ours will not be the last state to push this kind of a tax.
If you want to follow the discussion on twitter the hashtag #ncaffiliatetax has been used for these discussions….
Pitchforks anyone?
Update — 12:12pm
I just found out overstock.com is preparing to terminate North Carolina associates as well.
Update — 4:42pm
Another link to more information on the matter
Update — 7:41PM
Here is a more complete list of companies that have cut off North Carolina affiliates:
Amazon.com, textbooks.com, overstock.com (they may not have pulled the trigger, but have announced that they will), CSN (cable shopping network(?)), fingerhut, blue nile, shop nbc, cabela’s, Dr.s Foster and Smith.
I have read of several people that are moving out of state to continue their business elsewhere. All in all, it looks like this is the death of affiliate marketing in our state.
I have had suggestions to incorporate in another state, but it appears that doing so and maintaining control of the corporation, while keeping residence here would essentially be tax evasion and I could be pursued by the state for that (and possibly by the affiliate programs as well.)
The other option I see is either moving outright or establishing a business office in another state, which seems silly.
The more I read the text it sounds as though taxes must be collected not on all sales to North Carolina, but all sales made through affiliate links (where the affiliate link is “owned” by a North Carolina resident.) If that’s the case, then there is certainly the possibility of more than one state claiming the tax on that sale. (Say amazon is in CA and someone in CA clicks a link on my site (which is actually located in Utah in spite of my North Carolina residence….) Then the state of California claims they should pay sales tax (that’s where amazon.com is located) and North Carolina claims they should pay NC state sales tax because the “store” that referred them was based in North Carolina.
Update— July st 11:42 AM—
Musicians Friend is added to the list of affiliate programs that have axed NC businesses due to this pending law.
The more I read it – this may affect ANY advertising relationship – adsense (?) Essentially the language is broad enough to cover any kind of link for which the resident of North Carolina receives compensation. I think the only thing that might absolve adsense advertisers is that they have not entered into an agreement directly with the resident of NC, they entered into an agreement with google.
But what of other paid advertising on blogs? On news sites? ? What bothers me is that I’ve seen people say that it depends on how narrowly or broadly they want to interpret it. That’s a bad sign…. if they think they need more money they may just try interpreting more broadly…. This text is NOT the way to collect sales tax on internet purchases.
And if it were considered broad enough to go after advertisers in googles adwords/adsense network and google decided to keep NC publishers in…. then would they have to track for their advertisers which clicks came through NC publishers so the business could then decide if it owes NC sales tax (regardless of where the business and client are from?) Talk about a nightmare of tracking – no wonder so many affiliate programs find it easier to just pull the plug.
–update 11:10PM July 1st–
Okay – the terminations continue from companies…. now cafepress is cutting off North Carolina affiliates. My account hasn’t been terminated (only because I haven’t filled in the required information to receive payment. – So it appears I can keep my account as long as I agree not to be paid. (!))
Also, it was discovered late this afternoon that The General Assembly Fiscal Research division did not calculate in their estimates the lost income tax revenue from affiliate programs cutting ties with NC residents. So, their projection of how much this law will bring in is missing a fairly critical facet. This could be a very useful point to emphasize in future contacts with legislatures – underscore not only the growing list of companies that are pulling out, AND the loss of income tax revenue that this means (which is not included in the Fiscal Research estimate).
It’s also been mentioned that some of the Senators/Representatives have somewhat of a chip on their shoulder re: Amazon and it’s been suggested not to highlight their pull out, but to emphasize the OTHER companies that are following.
Also, Hawaii and California have shot down similar measures today. Congrats to those states and hopefully NC will follow their lead.
Also – now I hear Oriental Trading has cut off North Carolina Affiliates.