In 2011 the State of Illinois passed a law which required all online retailers to collect state sales tax if they made sales through affiliates based in their state. While this directly impacted affiliate marketers using virtually all types of affiliate programs, the ones that got the most public attention were from Amazon.com and Overstock.com. They decided to discontinue their affiliate programs to those living in the state of Illinois. This, of course, upset thousands of performance marketers throughout the state. Some of them were able to move their operations to another state, but this isn’t always an option, especially for smaller affiliates.
As of Friday, however, the Illinois Supreme Court agreed with a lower court ruling, which found that the state law was violating an existing federal law, which restricts states to requiring the collection of sales tax when a retailer has a physical presence in the state. This move has prompted companies with large affiliate programs like Overstock.com to start looking at opening their affiliate programs in the state again. In addition, CouponCabin.com is also looking at reestablishing offices within the state of Illinois.
Of course, at this point it is still to early to know exactly what any affiliate companies will do, but Jon Johnson, executive Vice Chairman of Overstock said, “We’re digesting the court’s decision, and if it feels like a final-final, we’d like to take advantage again of the good affiliate markets in Illinois. Affiliate marketing is a great way to market.”
Amazon also released a prepared statement in which they said they were, “excited to soon re-open our Associates program in Illinois.” Their associates program is, of course, the name of their affiliate marketing program.
Some companies which moved away from Illinois, however, are not interested in returning to the state which forced them out with the tax laws. Fat Wallet, a company which moved to Beloit, WI, has confirmed that they are not interested in returning to Illinois. They, and many others, had to invest a significant amount of money relocating their companies that it doesn’t make sense to move back again.
It is important for states to understand what kind of impact the laws they pass, especially those which are about taxes, will have on the individuals and businesses in the state. The Performance Marketing Association (PMA) has commented that when the Illinois law was passed in 2011, an estimated 9000 affiliate websites owned by Illinois marketers were directly affected. About 1/3 of them relocated their operations to other states. In the prior year, these Illinois based websites did $744 million in revenue, and paid an estimated $22 million in state income tax.
If the only impact is the loss of 1/3 of the affiliates, that would mean a loss of about $7.26 million in state income tax. Of course, the 1/3 that was able to move is most likely the largest affiliates, since they will have the financial resources to relocate their businesses. Many of the smaller affiliates would be forced to stay, and they may consider shutting down their affiliate sites, or moving to other earning opportunities.
The bottom line is, in the two years following the passing of this law, Illinois has not only lost millions of dollars from state income tax, but also driven away many innovative entrepreneurs and business owners. In the 12 other states which have also enacted similar laws, a similar number of affiliates moved away or closed their businesses. Hopefully states will eventually learn that attempting to add additional taxes on these businesses only serves to force them out of the state and into a more tax friendly environment.
