Like a parasite that kills its host, the cash-strapped government of North Carolina is driving Internet businesses away. And it’s using the Internet to do it.
The state's House of Representatives is set to vote on the version of a budget that includes a new “click-through” tax -- an alarming device.
The new tax would seek to bleed revenue from many different types of online businesses. Some people know it as the “iTunes tax,” as it will lead to taxes on tracks purchased on music services such as Apple Inc. (Nasdaq: AAPL)'s iTunes Store or Amazon.com Inc. (Nasdaq: AMZN). Companies will be forced to cut into their already-thin profit margins on music tracks or raise prices for the consumer.
The tax will also have other surprising, lesser known effects. Many companies pay Website owners the online equivalent of offline referral fees. Some sites like Amazon give site owners a percentage of the purchase price each time a user clicks through the link and then buys an item. Other promotions, such as Microsoft Corp. (Nasdaq: MSFT)'s Cash Back program, offer these discounts directly to the customer in exchange for using a specific service.
Before, these referral fees were supposed to be reported with income taxes. However, like many real-world referral fees, they typically go unreported. But under the new proposal, these referral rewards will be directly taxed. That has prompted Amazon.com to threaten to end its affiliates program in the state if the tax bill passes. The company recently sent its affiliates the following letter:
We regret to inform you that the North Carolina state legislature (the General Assembly) appears ready to enact an unconstitutional tax collection scheme that would leave Amazon.com little choice but to end its relationships with North Carolina-based Associates. You are receiving this e-mail because our records indicate that you are an Amazon Associate and resident of North Carolina...
The unfortunate consequences of this legislation on North Carolina residents like you were explained in detail to key senators and representatives in Raleigh, including the leadership of the Senate, House, and both chambers’ finance committees. Other states, including Maryland, Minnesota, and Tennessee, considered nearly identical schemes, but rejected these proposals largely because of the adverse impact on their states’ residents.
We thank you for being part of the Amazon Associates program, and we will apprise you of the General Assembly’s action on this matter.
"Unfortunate," indeed. Kayla Fay, a member of the Amazon Associates program, states: “They’re killing me, they’re killing my business. It will put a big crimp in my business if Amazon cuts us off.”
It's understandable why the government would look to tax the Internet, with record amounts of money flowing through it. However, the merits of such taxes are debatable, and it seems particularly destructive to try to pass them now, when the tech industry and the general public are already struggling to pay their bills and meet their current tax burdens.
On a national level, proposals to tax Internet traffic or apply other non-purchase online taxes have met with great resistance. However, proposals like this new North Carolina one, or an existing New York state sales tax on out-of-state goods sold by online retailers, are examples of a troublesome state-driven effort to squeeze the Internet for funds. Worse yet, state courts are playing a role in enabling the legislatures' tax plans: New York's Supreme Court has shot down a challenge to the online retail sales tax.
For now, New York has at least dropped its plans for an iTunes tax. Hopefully, North Carolina will reconsider the impact of such a tax and decide similarly, or preferably take it a step further and drop Internet taxation plans already.
After all, wouldn't it be logical for a state with one of the nation's highest unemployment rates -- over 10 percent -- to be trying to lure companies in with lower taxes?
In the end, attempts to tax the Internet bring to mind the classic children's book, The Giving Tree by Shel Silverstein. The government, having initially embraced the Internet, now has begun to look for ways to exploit this faithful friend. And like the child in the story, if they aren't careful, in the end they'll be left with nothing but a dead stump, a sad memorial to what could have been if they had only been less greedy.
— Jason Mick is an editor and columnist at independent tech news site DailyTech.