It appears Overstock.com isn't the only online retailer that has cancelled its ad contracts with affiliate marketers in Connecticut, as a result of a new tax state lawmakers passed as part of the two-year budget agreement.
According to industry sources, dozens of other online retailers have followed suit, raising questions about just how much revenue the so-called Amazon tax will raise to help plug the state's $3.7 billion budget deficit.
Under the law, retailers like Amazon.com and Overstock.com that have no physical presence in the state but enter advertising relationships with Connecticut-based websites will be required to collect a 6.35 percent sales tax from customers.
Only a handful of other states have passed a similar law, known nationally as the Amazon tax. Affiliate marketers in the state, who earn a sales commission by advertising online, products and services for out-of-state retailers, warned that the measure will lead some online retailers to stop doing business with them.
Overstock.com announced Tuesday that it is cancelling its Connecticut contracts June 1.
There are about 2,800 affiliate marketers in Connecticut.
According to industry sources the following 50 or so online retailers have also sent termination letters to affiliate marketers in the state:
•· 1800 PetMeds
•· Tog Shop
•· Steep and Cheap
•· Whiskey Militia
•· Chain Love
•· Bonk Town
•· Moonstruck Chocolate
•· Lamps Plus
•· Casual Living
•· Luggage Online
•· Costume Kingdom
•· CSN Stores
•· Gardener's Supply
•· Tea Forte
•· Design Linens Outlet
•· Buy Costume
•· Celebrate Express
•· Birthday Express
•· Costume Express
•· 1st Wishes
•· Northern Tools
•· Lamps Plus
•· Scrubs & Beyond
Before the passage of Connecticut's new law, online retailers did not have to collect a sales tax if they didn't have a "nexus," or physical presence in the state. That precedent was established in a 1992 Supreme Court case. Recently, however, states have been looking for ways to bypass that ruling as they desperately search for new revenue sources to plug budget shortfalls.
Online retailers that do have a physical presence in the state will often collect a sales tax from an online transaction. And Connecticut residents are also required by law to pay a sales tax if they buy goods out-of-state, but that provision is typically not enforced.
In the past several years New York, Rhode Island, and North Carolina passed similar laws to the one Connecticut is considering, arguing that affiliate marketers act as a sales force for the retailers, therefore giving the retailers a physical presence in their state and a way to tap into a potential revenue stream that could reach $11 billion next year.
Illinois and Arkansas have similar laws.
Amazon is challenging the New York law in court, and has ended its ad relationships with companies in the two other states.
One of the key questions surrounding the controversial tax is whether or not it will actually raise revenue for the state. Many industry insiders say it won't because if the tax passes, online retailers like Overstock.com will just sever their relationship with affiliate marketers in Connecticut, like they've done in other states.
If that happens, the online retailers without a brick-and-mortar presence in the state would no longer have a legal "nexus" in Connecticut, allowing them to bypass the collection of a sales tax.
In its assessment of the bill, the nonpartisan Office of Fiscal Analysis said the measure would raise $9.4 million a year, but only if online retailers don't terminate their affiliate agreements in the state.
State Rep. Chris Perone, a Democrat from Norwalk, said Wednesday that he believes the state should reconsider the Amazon tax.
"I voted against this tax because under the interstate commerce clause, attempts to collect sales tax are unconstitutional without Congressional approval." Perone said. "This is a complex issue and I believe there should be, if online sales were to be taxed, a simplified streamlined approach of tax collection at the federal level. I don't believe that it is in the best interest of Connecticut to impose this tax unless all 50 states require online retailers to charge sales tax."