By Allan Maurer
FIRST IN A SERIES RALEIGH, NC—North Carolina made another national business list recently, but unlike the many citing the state’s attractive business climate, this one, from the Internet Advocates Watchlist, puts three recent NC laws on its top ten list of iAwful legislation. One, the so-called “Amazon tax,” which led the Internet retailer to unceremoniously cut off its North Carolina marketing associates, is likely to result in “All pain and no gain,” says one NC entrepreneur.
North Carolina, like several other states wrestling with recession deepened budgetary problems, passed a bill that says Internet advertising by Amazon and other companies with affiliates in the state triggers “nexus,” or a presence in the state that means the out-of-state business has to pay sales taxes.
The state followed New York and Rhode Island, which passed similar laws, but the New York bill is already facing legal challenges claiming it is unconstitutional.
The bills, also being considered in a number of other cash-strapped states, use the affiliate advertising by companies such as Amazon or Overstock.com to establish “nexus” to tax them, although it is unconstitutional for a state to tax an out-of-state business.
NC State Senator David Hoyle, a Democrat, who has been a small business owner himself, tells TechJournal South the bill is an effort to “level the playing field between Internet retailers and brick and mortar stores such as Barnes & Noble.”
He points out that the state already requires residents to pay sales taxes on items they buy from Internet retailers such as Amazon or Overstock, and actually collects “several million dollars from people who pay it voluntarily.”
When considering the bill, NC legislators heard from “experts” who told them New York was already collecting sales taxes from Amazon via such a bill.
Sen. Hoyle admits that the U.S. Congress may need to address the issue to clarify whether or not states can legally establish nexus because Internet retailers advertise via affiliate or associate marketers.
The state plans to examine its entire tax structure this fall, he says.
State hanging out ‘Tech Not Welcome’ sign
The North Carolina Technology Association, an organization representing the state’s considerable technology sector, lobbied against the bill and another of the three “iAwful” laws NC passed, which taxes software product downloads.
It managed to get the software download bill amended so that it does not affect large businesses such as Cary-based SAS.
Although NCTA objected to the B-2-B taxation period, the bill still affects smaller companies and startups, one of the things worrying some entrepreneurs, attorneys and technology lobbying organizations.
NCTA President and CEO Brooks Raiford says the organization expressed concern about the new bills on two fronts. “The economy was completely in the tank, so adding new taxes was a concern to consumers and to businesses.”
More to the point, however, he says NCTA argued that “North Carolina has worked so hard to develop a technology friendly reputation and doing things that won’t generate much revenue could hang out a technology not welcome sign.”
All Pain, no gain
Nevertheless, he says, “We couldn’t find much appetite on the part of key legislators to eliminate the ‘Amazon tax.’ We got no traction.”
Raiford says NCTA wants to be at the table when the legislature “Re-opens this Pandora’s box this fall.” He says NCTA hopes they realize the click-through “Amazon tax” won’t generate the revenue they expected and will be mitigated by loss of taxable income.
He also points out that the state is already showing up in national media in a bad light and the similar New York law is under constitutional challenge. It costs substantial amounts of money for a state to battle such challenges.
It may also lose money because companies doing substantial business with Amazon or other Internet companies based out of state as associates or affiliates will or have moved their businesses to states without such laws.
The Raleigh News & Observer reported the loss of at least one such company making up to $70,000 a year as an Amazon affiliate which moved before the company cut off its associates in the state. That means those companies will no longer pay state income taxes on their revenue. (TechJournal South does no affiliate business with Internet retailers).
Morrisville-based Bob Butler, a serial entrepreneur and CEO of Bestthinking.com and ReallyWho.com, an identity verification site for social networking, says, “The closer you look at these laws in the real world, the more you find it’s actually much worse than what your instincts are telling you. They’re all pain and no gain.”
Butler says he believes “It will kill the Internet startup sector in North Carolina because it destroys that early revenue so critical to validating your company and accessing venture capital. This is a very real and devastating problem.”
Next: The potential effect of these laws on startups and TechAmerica’s position that they “Put a crimp on innovation.”
Are you affected by any of the recent Internet related tax laws passed in North Carolina or those under consideration in other Southeastern states? If you would like to be a source for future installments of this series or want to comment, on the record, regarding published installments, email TechJournal South editor Allan Maurer: Allan@techjournalsouth.com.
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