Phone Service Feature

Never underestimate the hypnotic lure theoretical tax revenue has on politicians.

The Associated Press (News - Alert) is reporting that a bill requiring online retailers to pay the same Virginia sales taxes as traditional stores was approved by a Senate committee, and heads to the Senate for a full vote, probably next week.

Sen. Emmett Hanger's measure would hold companies such as Amazon and Overstock.com  'accountable for the tax as brick-and-mortar shops,' the AP said. It's known as an 'affiliate tax,' or 'Amazon tax.'

Hanger's bill would collect the tax from state-based businesses that affiliate with major multinational online shopping businesses such as Amazon and Overstock.com.

The way it works, major online firms 'serve almost as wholesalers for Virginia-based Internet businesses that feature their hyperlinked banner ads. The local company receives a share of the sale -- a transaction on which no sales tax is paid,' as the AP explains.

Large Internet retailers simply end affiliate programs where states try to tax them. Last year governors of Hawaii and California vetoed similar measures. Yes, you read that correctly -- California actually rejected a proposed tax. Earlier this week Colorado's state government killed a similar proposal to tax local affiliates as well. A so-called Amazon tax in New York is currently being challenged in court.

Interestingly, the Virginia bill's fiscal impact statement reported that such measures had backfired in other states: 'When similar legislation was enacted in Rhode Island and North Carolina, large online retailers ended their affiliate programs. If this were to happen as a result of this bill, there would be no additional revenue from the enactment of this bill.'

In fact, the impact statement noted, 'by ending the affiliate program with Virginia vendors, such vendors would likely lose business and remit less Retail Sales and Use Tax to Virginia.'

Which is, in fact, exactly what happens: A couple weeks ago AffiliateTip.com reported that The Providence Business News published an article titled 'Amazon tax has not generated revenue,' finding that after passing the tax, officials at the Rhode Island Department of Revenue “do not believe that there has been any sales tax collected as a result of the Amazon legislation,” according to Paul L. Dion, who heads the department’s revenue-analysis office.

In fact, AffiliateTip.com found, 'there is less income being earned, as a result of affiliates being fired. In turn, there is less income for the state to tax.'

General Treasurer Frank T. Caprio, a candidate for governor of Rhode Island in December 2009, said 'The affiliate tax has hurt Rhode Island businesses and stifled their growth, as they’ve been shut out of some of the world’s largest marketplaces, and should be repealed immediately.”

In 1992 the Supreme Court ruled in Quill v. North Dakota that a company must have a 'substantive physical nexus' in order for the state to require that company to collect sales taxes, according to taxpayer advocate Kelly William Cobb. The affiliate programs Virginia wants to tax do not fall under that definition, opponents of the tax argue.