In the last legislative session, Democrats passed a new “affiliate nexus tax,” an attempt to force Amazon.com to pay sales taxes. This new tax targeted a form of online advertisement called performance marketing, in which a Minnesota-owned website runs an ad and gets paid only if a visitor clicks the link to go to the advertiser’s website and purchases a product from that advertiser.
In Minnesota, according to the Performance Marketing Association, 5,200 businesses have used this type of advertisement to make more than half a billion dollars a year. Those businesses paid $35 million in annual income tax.
My website, PaddlingLight.com, based in the small, remote, rural town of Grand Marais, is one of the many Minnesota-based websites that depended on performance marketing advertising to make money.
Since Gov. Mark Dayton signed the Internet sales tax legislation, thousands of online retailers have ended their advertising relationships with websites owned by Minnesotans. While you may have heard about Amazon.com’s severing relationships in the state, you probably haven’t heard about the smaller companies that are fleeing Minnesota, such as those that have ended advertisement relationships with my website. These include small companies such as Moosejaw, Steep and Cheap, Backcountry.com, Wetsuit Warehouse and others.
Democrats claim that even though all these companies are refusing to do business with Minnesota-owned websites — which saves them from having to collect this new tax — somehow the tax will raise $5 million. This is unlikely. In Illinois, before an affiliate nexus tax was declared unconstitutional under the Commerce Clause, the state actually lost sales tax revenue.
Just as in other states that passed this tax, Minnesota businesses face a tough choice: Move out of the state, close down or downsize. In other states, according to the Performance Marketing Association, about a third left, a third closed their doors and a third downsized. If Minnesota businesses follow the same pattern, it doesn’t take a math genius to realize that at least $23.1 million of the yearly income tax paid by the 5,200 Minnesota businesses will be gone. Not only that, but much of the half a billion dollars in yearly income won’t be around to be pumped into the local economy.
The Democrats claim this new tax will generate $5 million in extra sales tax revenue, but it must not have occurred to them (or perhaps they didn’t care) that it also will cause a loss of at least $23.1 million in income tax. Simple math shows an overall loss of at least $18.1 million in tax revenue. That’s a big hole that Democrats are going to have to plug.
Bryan Hansel runs www.paddlinglight.com in Grand Marais, Minn.