Filed under: Law, Competitive strategy
Last week, Amazon.com (NASDAQ: AMZN) filed a lawsuit in New York over the state’s new law, which requires on the web retailers to collect sales tax from New York customers if the company has affiliates in the state soliciting sales for them.
Most state laws only require sales tax to be collected in a say if a company has a nexus, or physical presence there. Most says require purchasers of products who haven’t paid sales tax on the items to voluntarily report the purchases to the state and pay use tax on them (the equivalent of sales tax). As you can envision, in the government’s eyes, this leaves plenty of tax money on the table as consumers rarely report these buys to their home states and therefore avoid sales and use tax altogether.
New York’s new law is a move to collect taxes on these sales, but it has angered Amazon.com and other companies. Affiliate programs are important to increase sales, as the “affiliates” are basically people and businesses who refer others to Amazon.com to make buys. Amazon.com fought back, and now perpetual money-loser Overstock.com (NASDAQ: OSTK) is fighting back in its own way. Overstock is canceling its agreements with all of their affiliates in New York. If New York is going to use that affiliate relationship in order to impose sales tax on world wide web sales going to New York, then darn it, Overstock.com is going to show them!
On the one hand, I have the ability to understand that the company wants to send a message to New York government officials that their new law is unpopular. On the other hand, does Overstock really need to do anything else to the detriment of its business model? The company has about 3,400 affiliates in New York, all of which are being cut off indefinitely. Many of those are small companies or individuals who only make a bit of of money from the relationship and probably won’t experience any hardship because of the change. But some are companies with a substantial monetary interest in continuing their affiliate relationship with Overstock.com.
I can’t see affiliates being happy over this move by Overstock, and I can’t understand why an unprofitable company is willing to lose sales by doing this. The company has never, in its history, had a profitable year. “Success” to the Overstock.com management team means losing less money than in the past and having less junk inventory on the books. Technically, those things are operating improvements, but they don’t really warrant a party.
Overstock.com CEO Patrick Byrne is known for focusing on everything but running his company well. While it may be commendable for the company to take a stand against what it believes is an unfair action by New York, does this act really offer any value for the owners of the company? I can’t see that it will help sales or profits. Rather, it will likely hurt sales as the company cuts off affiliate relationships that undoubtedly help the company sell more products. Is that fair to the shareholders of the company?
Overstock.com executives like to compare their pathetic operations to Amazon.com. Compare this: Amazon isn’t slicing off its New York affiliates. Maybe because doing so is a bad business move? Byrne and company take note.
Tracy L. Coenen, CPA, MBA, CFE performs fraud examinations and financial investigations for her company Sequence Inc. Forensic Record-keeping, and is the author of Essentials of Corporate Fraud.
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