Affiliate Marketers Beat Colorado Internet Tax

March: In late February of 2010, Forbes.com brought us a first-person report about how Colorado-based affiliate marketers helped kill a proposed affiliate marketing sales tax.

The story’s author, Marc Braunstein, founded ShopAtHome.com with his wife Claudia in 1986.

That’s right. 1986. Braunstein says that “nearly 31 million people saved money” with his business in 2009 alone.

In other words, the man knows his business. And it turns out he also knows his politics.

As Braunstein tells it, the state of Colorado was looking at passing a tax bill that would have made Colorado-based affiliate marketers responsible for collecting sales taxes on the sales they generate for their affiliate partners.

Braunstein says that if the affiliate tax had passed, it would have killed “thousands of small and medium-sized companies.”

Because that’s just what we need in a recession – to kill off the small and medium companies that generate all of the real innovation and wealth in this country.

Let’s get back to the point. Lots of states are looking to try to make tax money from the Internet. Unfortunately for them, there’s a US Supreme Court decision that says a state can only collect sales taxes from companies that actually have a physical presence in that state.

The Colorado legislature was considering trying to get around the SCOTUS decision by claiming that since the affiliate marketers are located in Colorado, the marketers themselves are the physical locations of their affiliate partner companies.

Look. We’re talking about organizations – states – whose revenues have been crushed by the current recession.

If they could figure out a way to tax your for breathing, they’d do it.

Back to Braunstein and his fellow affiliate marketers. Faced with this threat to their livelihoods, Braunstein says that the affiliate marketers joined with “bloggers, online retailers, business leaders and the Performance Marketing Association in a massive coordinated effort,” to kill the affiliate tax.

According to Braunstein it took “many 15-hour days at the Capitol,” but they ultimately convinced the state legislature that the new tax would do more harm than good.

You’d like to think that most state governments would be too smart to pass such a law. You’d be wrong.

Braunstein says that Rhode Island and North Carolina have passed similar tax laws. The result has been that affiliate marketers in those states have shut down. However, outstate online retailers are still able to market to Rhode Islanders and North Carolina residents online, just like they always have.

In other words, they killed their local businesses and moved the revenues those businesses generated outside of state lines.

Not smart.

Now, as online entrepreneurs we all need to be aware that we’re living in some challenging times tax-wise. The movement to online commerce means that states are being denied ever-larger amounts of sales taxes they would otherwise collect at a time when their other revenues are shrinking.

My advice is to be aware of tax and other state and federal legislation that could affect your business – before these bills are passed.

If we want to stay in business, more of us are going to have to bring our dedication and intelligence to bear on legislation.

Think of it as a small cost of doing business that will keep your larger costs from getting out of control.