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Overstock Exits Connecticut Online Ad Market To Avoid Sales Tax

State Plans To Start Collecting From e-Retailers July 1

Mara Lee

May 25, 2011

Overstock.com said Tuesday it is exiting the Connecticut market for online advertising, in retaliation for the state's plan to begin charging sales tax on purchases from Internet retailers on July 1.

Local affiliates that get a cut of the sales price when someone buys a product through an Overstock.com link on their pages will no longer get that money. It's not clear how much money will no longer be paid to bloggers in this way.

Overstock.com, Amazon.com and other online retailers that have operations in Connecticut would be subject to the sales tax starting July 1, under the budget approved by the House and Senate and signed by Gov. Dannel P. Malloy. Both companies lobbied hard against these proposals.

Overstock has also sued states that require it to charge sales tax on its goods. And the company is offering incentives directly to its customers.

"It is unconstitutional for a state to pass a law making out-of-state retailers collect sales tax simply for having business relations with marketing affiliates in those states," said Overstock.com CEO Patrick Byrne, in a written release.

"So we have severed relationships with all of our affiliates in Connecticut, and have taken the money we would normally pay those affiliates, and are using it to reward our best customers in those states," Byrne said. "Any customer in Connecticut that has spent more than $300 in the past year will receive a free Club O membership (normally priced at $20) and their membership account will come preloaded with an additional $10 balance."

Byrne said in an interview that Overstock gives a couple of hundred Connecticut sites a cut of sales, and he said most receive more than $2,000 a year in income from the arrangement. He did not know what the total amount of revenue was for these Connecticut partners, though he said the company does more than $100 million in sales nationally.

Connecticut is the latest state to propose such a change — New York, Rhode Island, Illinois, North Carolina and Alaska have already done so, and Overstock stopped placing ads on blog pages in those states to avoid the tax, too.

The tax proposal would require any company that pays local bloggers a cut when purchases are made through their pages with at least $2,000 a year in such payments, to charge sales tax.

Sen. Andrew Roraback, R-Goshen, ranking Republican on the legislature's tax-writing committee, essentially said "I told you so" Tuesday.

"This should come as no surprise," Roraback said in a written statement. "What was so clearly foreseeable has now occurred. The governor's own tax commissioner cautioned the legislature that the Internet tax was not workable and would likely result in a loss of revenue for the state. Today, we learned that legislative Republicans who opposed this measure were correct when they voted not to impose this new tax. Sadly, the only consequence to this ill-considered measure will now be to inflict real harm on Connecticut-based businesses."

Roraback was referring to an April 21 memo from Revenue Services Commissioner Kevin Sullivan to Ben Barnes, Malloy's budget chief. Sullivan said no state that has adopted the so-called Amazon tax aimed at collecting revenue from online retailers with local operations has collected any money from the tax. The reason, Sullivan said, was that the laws are being challenged in court, and that companies such as Amazon that are targeted have ended revenue-sharing operations in each state — other than New York, where they are mounting the court challenge.

The state estimated that $148 million worth of online purchases each year would become subject to the sales tax, for $9.4 million in revenue.

Amazon has not yet declared it will end revenue-sharing deals with Connecticut website owners, and did not return a call for comment.