States across the country are in a financial mess. Desperate to balance the books they are raising taxes, reassessing property values, and finding any way they can to collect more dollars from their citizens as well as the companies that do business within their respective borders. The latest trend in garnering more revenue is not really new. What is new is how some states are trying to define businesses.

Typically a state can charge tax on any goods or services sold within their borders IF that business has a physical presence in the state. Therefore a company like Amazon would have to collect taxes on goods and services sold in Washington, where they are headquartered, but sales in all other states had no tax. Tax free shopping is one thing that made Amazon so popular. In comparison, Barnes & Noble, with physical stores in many states would have to collect tax on Internet sales in all of those states.

We have all lived under this system for quite some time. We have even gotten used to it. What is changing now is the definition of a physical presence. Illinois is proposing that affiliates of companies constitute a physical presence and thus Amazon tax on the purchase of goods and services are subject to taxation. Thus, if a website owner lives in Illinois and has Amazon banner ads on her website, Illinois will require a 6.25% sales tax be collected.

Amazon feels so strongly about the issue that they are canceling all affiliate programs in Illinois. Should the trend of states wanting taxes continue we could well see many national companies changing their affiliate programs substantially. This could include Sirius XM, which has affiliate programs themselves (SiriusBuzz does not participate in any Sirius XM affiliate programs).

The irony is that most states would not have to enact new laws to collect taxes, and technically they can say this is not a new tax. They simply need to change the definition of what a business is within their borders to get the cash rolling in. As usual, the costs, or taxes, would simply be passed on to the consumer. However, to remain competitive it could mean that affiliates will see less commission as the national companies try to keep prices in check. It could also mean that companies could do business differently in one state vs. another, or forgo some states altogether.

The music industry accounts for billions in sales each year. In days gone by consumers would buy records, tapes, and CD’s at a local retailer and pay tax. Today, people are getting what they want when they want via the Internet. In most cases these purchases are tax free. With the economy in the state that it is in, it was only a matter of time before states figured out a way to get their pound of flesh.

How far will this go? It likely depends on how desperate any given state is. Sirius XM has physical offices in New York, Washington D.C., and New Jersey. They likely have affiliates in every state. While this may not seem to be a huge deal, it has the potential to really shift how affiliate programs run in the future as well as how consumers shop. Typically the margins on such programs are so slim that the affiliate makes very little already. The tax free aspect of Internet shopping is an attraction for consumers. If they are charged a tax anyway, will they seek out a physical store instead of buying over the net? If there are many different tax issues, is it worth Sirius XM selling music downloads themselves or better to simply refer these possible purchases to Amazon and iTunes like they currently do? Will Internet radio businesses like Pandora, Spotify, Slacker, and Mog need to re-visit their own business models and how they handle downloads? Only time, and the economy will tell.

[via Billboard]

Position – Long Sirius XM Radio