Online sales tax bill hits wrong target

A March 24 Star Tribune editorial supported a bill that would require online companies to collect Minnesota sales tax if people in the state participate in the companies' affiliate marketing programs.

The Legislature is considering such a bill (SF 458), which seems largely directed at the mega-online-retailer Amazon.com.

Unfortunately, the legislation won't result in one dime of sales tax being collected from Amazon.

In 1992, the Supreme Court held that businesses must collect sales tax only in states where they have a "physical presence" or "nexus." Commissioned salespeople employed by a company in a state understandably meet this criteria.

The Minnesota Senate bill seeks to redefine "nexus."

It reads: "A retailer is presumed to have a solicitor in this state if it enters into an agreement with a resident under which the resident, for a commission or other consideration, directly or indirectly refers potential customers, whether by a link on an Internet Web site, or otherwise, to the seller."

Such a law would affect online bloggers who participate in "affiliate marketing" like the Amazon Associates Program. Under the program, individuals who have websites or blogs can link to products on Amazon.

Suppose a Minnesota blogger has a website devoted to teaching people foreign languages. The website is hosted by a company in Utah.

To help offset the costs of operating the site, the blogger links to some recommended language books at Amazon. If a visitor to the website follows a link to Amazon and purchases, say, "The New Penguin Russian Course" for $12, the blogger might earn 50 cents.

Under the proposed legislation, somebody who visits this website from Colorado via servers in Utah and buys a book from Seattle-based Amazon somehow creates a "nexus" in Minnesota.

I guess in a virtual or legislative world, that could make sense.

Because of the existence of bloggers who participate in Amazon Associates, the new law would require Amazon to collect tax for all taxable sales made to Minnesota residents.

What has happened in other states that have passed similar legislation? In one, New York -- home to many substantial publishing companies whose links are vastly more important to Amazon -- Amazon is collecting sales tax but is also challenging the law in the courts.

In Hawaii, North Carolina, Colorado, Rhode Island and Illinois, by contrast, Amazon ended its relationship with associates in those states when their legislatures tried to redefine "nexus" as including blogger websites who link to Amazon.

Minnesota is much more like Colorado than like New York.

What this law would do is harm Minnesota bloggers. A very successful blogger who earns substantial income via affiliate marketing links might need to consider relocating to another state, because the best affiliate marketing programs will no longer be available in Minnesota.

The bill is supported by a coalition of large corporations that do have a substantial physical presence in most states -- Wal-Mart, for example. Wal-Mart, Best Buy, Barnes & Noble, and other major retailers have been soliciting exiled Amazon Associates and encouraging them to join their affiliate programs.

Because these other corporations can't compete with Amazon in getting people to join their affiliate programs, it seems they have sought to legislate little blogging Amazon Associates out of existence. Bloggers have become pawns in fights between billion-dollar corporations.

Many storefront retailers also feel it's only fair that Amazon collect sales tax. But those shops benefit from Minnesota tax dollars. If a fire starts in their store, the fire department will respond. If an unruly customer disrupts their store, the police will respond.

This issue is best decided at the national level. If the consensus is that tax should be collected for all online sales, federal legislation should be passed that requires it of larger online retailers. That's the only way to prevent Amazon and some other corporations from avoiding such a tax.

The proposed Minnesota legislation will only lead to Minnesota bloggers being harmed without any benefit to the state.