I do not know the originator of this quote, nor my law professor that I first heard this from – but it stuck with me.
“Law Dictates Behavior”
My disclaimer: I cannot confirm that any of the events below actually took place, I have made up these fictitious events and sprinkled them with sarcasm.
Consider the Consequences
It can be very frustrating when decisions are made without fully considering the consequences. There are always multiple potential outcomes and not always the ones you may want. This is particularly frustrating when legislation is considered or enacted. The knee jerk reaction to regulate everything is debatable by many. Sometimes communication with the parties involved before enacting new legislation can help to counteract negative consequences. This does not just apply to legislation, even with your own business you need to always consider the consequences or you leave yourself open to unfortunate ramifications.
Oops I Didn’t Think That Would Happen
Unfortunately as I read the stories of Amazon and affiliates in various states I have to wonder if someone said “I bet if we do X then Y will happen, oops looks like we were wrong and Z happened instead.”. What I am referring to are the various states that decided to enact legislation to have online retailers collect sales tax: Colorado, Rhode Island and North Carolina. Here is what they decided to do and say.
You Have Affiliates – Give Us Sales Tax!
In a nut shell these states said to themselves we want sales tax collected by an out of state online retailer for items bought by residents of our state if the resident got to the online site through a resident affiliate. Therefore the online retailer has a presence in our state through affiliates. They then smiled and said “Cool, we just solved our budget problem, instead of spending less we can just increase taxes and generate more revenue – we are sooo smart.”, after which there were high-fives all around.
Then Amazon, which generates phenominal revenue and has thousands, if not tens of thousands of affiliates, said “Wow, that is a huge operational cost and we do not want to take it on so we will just cut ties with all those affiliates in your state. Let’s just do a quick database query for all affiliates where state==Colorado, Rhode Island, and North Carolina. Okay now a quick email that explains they are no longer an affiliate, bye. [click send]. There, done, problem solved.”
So states like Colorado thought if they added sales tax due to affiliates in the state (X) then they would increase revenue through the sales tax from those like Amazon (Y), but did not consider (Z) that Amazon would just let those affiliates go. It seems that the law did indeed dictate behavior, just not the behavior the law makers intended. I for one hope the lawmakers at least had a discussion with Amazon and others prior to enacting such a law, otherwise they played loose with their own tax paying residents sources of income.
What Will Other States Do?
Now it will be very interesting to watch and see what other states do. What is most interesting to me is that fact that all of those that were just fired as affiliates due to their state laws may just leave that state. Now the states have two unintended consequences, they did not obtain the additional revenue and they lost a group of tax paying citizens – oops.
Much like you may incorporate in a state that is not your own due to the laws, and case law, that exists for corporate entities, you may now need to choose your state of domicile based on state e-commerce laws. Fascinating.
Here is the associated press article, and you can find others with regard to North Carolina and Rhode Island online as well.