Amazon gave notice to its Illinois-based affiliates yesterday that it will end its relationship with them effective April 15 as a result of a new law that requires Amazon and other online retailers based outside the state to collect state tax on purchases made by Illinois residents. The Illinois law, which Gov. Pat Quinn signed yesterday, takes effect immediately.
The law says e-retailers have a physical presence in Illinois if they work with online advertising affiliates there, which means e-retailers such as Amazon must collect state sales tax if they continue to work with Illinois-based affiliates. Affiliates, typically informational web sites and bloggers that host ads for retailers, and their trade groups say the law will hurt their businesses significantly and drive revenue out of the state.
Illinois is the fourth state, joining New York, North Carolina and Rhode Island, to enact a law that says affiliates constitute a physical presence in the state. Several states, including California, Massachusetts, Texas and New Mexico, have similar measures under consideration. Amazon terminated its relationships with affiliates in North Carolina and Rhode Island, but maintains relationships with affiliates in New York, where it is fighting the law in court.
Amazon says it has thousands of advertising affiliates in Illinois. “We deeply regret that [the law’s] enactment forces this action,” Amazon says in a letter. The e-retailer says it will pay affiliates all qualifying advertising fees earned prior to April 15, but that it will close all Illinois-based affiliate accounts on that date. In the letter to affiliates, Amazon, the No. 1 retailer in Internet Retailer’s Top 500 Guide, says it will reinstate affiliate accounts if the affiliates move to another state. Amazon did not say how many affiliates it has in Illinois.
Illinois-based affiliate marketing company FatWallet.com says it’s seriously considering moving to Wisconsin. FatWallet owner and founder Tim Storm says he expects the law, and other e-retailers’ expected moves to end relationships with affiliates in Illinois, will affect 30% to 40% of FatWallet’s top-line revenue. He says he expects more e-retailers affected by the bill will follow Amazon’s lead and move to end their Illinois affiliate relationships, although as of this morning he hadn’t heard of other terminations. Overstock.com said yesterday it will end it relationships with Illinois affiliates.
FatWallet, based in Rockton, IL, is near the Illinois-Wisconsin state line. The company has 55 employees. “The simple answer for us is that we can hop five minutes north and we’re in Wisconsin,” Storm says. “Is that the best answer? We don’t know yet, but we want to be able to analyze our options. I have to do what is right by our employees.” Scott Kluth, owner of Chicago-based affiliate marketing company CouponCabin.com, has previously said that the new law could cost him a third of his revenue. He says he’d consider moving to Indiana.
Both houses of the Illinois General Assembly approved the bill in early January, but it didn’t become law until Quinn signed it yesterday. Storm says he and other Illinois-based affiliates spent time and money lobbying against the bill over the last year, which included a meeting with the governor.
Rebecca Madigan, executive director of the Performance Marketing Association, a trade group that represents affiliate marketers, was also at the meeting, which took place Feb. 4. She says she and the affiliate marketers in attendance left the meeting hopeful that Quinn would not sign the bill. The meeting, which was supposed to last 10 minutes, ran almost 90 minutes, she says. “We really thought he had taken some thoughtful time to look at it. We believed we got to him and made it difficult for him to sign the bill,” she says.
Storm and Madigan say the Illinois General Assembly approved the law near the end of the legislative session with little debate. “There wasn’t any real dialogue about this. It was shoved onto existing legislation that had already been dealt with and was rubber-stamped during a lame-duck session,” Storm says.
Because a new legislative session began in mid-January, by law the governor could only sign the entire bill or veto it. The governor issued a statement yesterday expressing his support of the new law. “This law will put Illinois-based businesses on a level playing field, protect and create jobs and help us continue to grow in the global marketplace,” Quinn said.
When contacted by Internet Retailer, a spokeswoman for the governor’s office said the state proposed a program to connect affiliates that may be affected by the new law with other potential sources of affiliate revenue. The program is being run by the Alliance for Main Street Fairness, a retailer group that lobbies for rules that require all retailers to pay state sales tax. The program’s home site, standwithmainstreet.com/affiliate, reads: “Did you get thrown under the bus? If so, we have a network that connects affiliates with retailers across the nation. To learn more, sign up below.”
Most retail chains support laws requiring the collection of sales tax on all Internet purchases because their bricks-and-mortar stores give them a physical presence in many states, thus requiring them to collect sales tax on web purchases. They argue that puts them at a disadvantage compared with web-only retailers that don’t collect sales tax.
The governor’s spokeswoman offered few details about the effort to aid affiliates, but adds that the Illinois Department of Commerce and Economic Opportunity, the Illinois Retail Merchants Association and the Alliance for Main Street Fairness will continue to work to provide business opportunities that will bring jobs to Illinois.
Approximately 9,000 affiliates are based in Illinois, according to the Performance Marketing Association. In 2009, the last year full details are available, Illinois affiliates collected $611 million in advertising revenue on which they subsequently paid about $18 million in state income tax, Madigan says. She says Illinois affiliates represent 4.5% of all affiliate revenue in the United States and that the state has the largest concentration of any state of “super-affiliates,” which she defines as affiliate marketing companies with 50 or more employees. This includes FatWallet.com.
Madigan says most affiliate marketers work with many e-retailers, but that affiliates will find it difficult to make up the income they will lose when Amazon and other online-only retailers terminate their relationships in Illinois. “States can’t compel out-of-state retailers to collect state sales tax for them. E-retailers will terminate their relationships and the state will not get new sales tax,” she says. “People who depend on this advertising revenue get hurt and small businesses will have to lay off people or move.” Uncertain of its next moves, FatWallet.com says it has already pulled two job listings.
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