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North Carolina

Is Amazon.com Playing Favorites?

July 1, 2009 · 4 comments

Last year, New York decided to aggressively pursue a sales tax rule already on the books by expanding the definition of venue to include companies with affiliates physically present in the state. Many vendors, Amazon.com included, made a lot of noise about pulling their affiliate program; interestingly, Amazon.com didn’t go anywhere. They did, however, challenge the imposition of the tax and lost. A strongly worded opinion from the court noted that Amazon didn’t “even come close” in successfully arguing that the affiliate programs were merely advertising. At the time, I posited:

What does it all mean? I think there will be two significant outcomes:

1, Online retailers will begin to rethink the way that they do business with affiliates – especially in a tough economic climate.
2, Other states will jump on the bandwagon. California, anyone?

Sure enough, in May of this year, California began exploring ways to enforce collection of sales tax from online sales – clearly a wink at the existing New York victory. Curiously, Amazon.com has remained relatively quiet.

But of course. Those are, after all, the big boys. New York and California are two of the largest, wealthiest states. Pulling affiliate programs out of those states, in my opinion, would be dramatic and costly – especially considering that the tax wouldn’t come out of Amazon’s pocket.

But say you wanted to make a statement, fire a warning shot to other states that might be considering similar behavior… What would you do? If you were Amazon.com, maybe you’d start pulling your affiliate programs from smaller states.

Sure enough, in May of this year, many Amazon.com affiliates in North Carolina received this letter via email (provided to me from an affiliate):

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.

Please note that this is not an immediate termination notice and you are still a valued participant in the Associates Program. All referral fees earned on qualified traffic will continue to be paid as planned.

But because the new law is drafted to go into effect once enacted – which could happen in the next two weeks – we will have to terminate the participation of all North Carolina residents in the Amazon Associates program on or before that same day. After the termination day, we will no longer pay any referral fees for customers referred to Amazon.com or Endless.com nor will we accept new applications for the Associates program from North Carolina residents.

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.

The North Carolina General Assembly’s website is http://www.ncleg.net/ , and additional information may be obtained from the Performance Marketing Alliance at http://www.performancemarketingalliance.com/ .

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.

Unconstitutional, you say? A Manhattan Supreme Court judge sure didn’t think so.

When I asked via twitter for affiliates in North Carolina to comment on the proposed pull out, I received a number of similar responses. One commenter summed up the sentiment nicely:

I run several web sites that sell books. I’ve been working on these sites for 2 years now, building them up with good content. At the start of June, for the first time ever, I started seeing the fruits of my efforts. I started seeing a decent return coming in from my Amazon referral fees.

So you can imagine how devastated I am now that my account is closed. My account had close to 200 outstanding orders that hadn’t yet shipped yet when the account was closed. That’s money I’ll never see. On top of that, today I checked my account (as of this writing we can still login to our accounts) and discovered that several high priced electronics had been purchased through my link. You can imagine how this made me feel. Right now I’m sitting here with a throbbing headache – I think it’s stress-related.

I hope the NC legislature removes Section 27C.2 from the proposed budget bill. I’ve really enjoyed being an Amazon affiliate and don’t want the relationship to end.

North Carolina, for its part, isn’t backing down, just as New York held its ground. The online retailer maintains that the tax is constitutional. It’s interesting that Amazon.com has chosen to argue that it isn’t constitutional in the media but so far as I know, it hasn’t made that argument in a North Carolina court. Maybe, just maybe, it’s not an argument that Amazon.com thinks actually has much merit. But then, I’m just speculating.

With one state down, Amazon.com has forged on. The online giant also cut ties with Rhode Island and today, it just announced that it will cut affiliate ties with Hawaii.

Quite the powerhouse line up (with apologies to my readers in Rhode Island, Hawaii and North Carolina). Are you perhaps seeing a pattern?

I know, I know. Amazon.com surely has some wonderful explanation for its cherry picking. I’m sure of it. And I’d really love to hear it. Because otherwise it sounds like, well, you know… that some states are just a little more valuable to them than others.

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Lights, Cameras, Tax Burden Shifting

June 25, 2009 · 2 comments

51mAHwbp7kL._SS500_.jpg The highest grossing movie of all time is Titanic, which has amassed nearly $2 billion in revenue in just 12 years. The five Harry Potter films, all released within the last 10 years, have grossed nearly $5 billion in revenue. It’s clear that even in an age where there are other distractions – TV, cable, internet – Americans are still going to the movies and movies still make a whole lot of money. But for who?

You and I know the answer to that: producers, big movie companies and stars like Cameron Diaz and Angelina Jolie who, for some bizarre reason, command millions and millions of dollars per picture.

Many states are hoping to grab a piece of the movie pie, even as their budgets are crumbling. Lawmakers seem focused on handing out tax breaks to woo production of movies and television to their respective state even in the midst of data that suggests that those tax breaks don’t actually benefit the state.

Two of the biggest entertainment centers in the world, New York and California, have pumped literally billions of dollars into the entertainment industry: both states are facing massive deficits this year. And despite throwing tax breaks at Hollywood, states are finding those companies to be fickle: the companies really just chase the money.

Take California for example. The state has spent loads of money to keep the movie industry inside its borders, despite a $24 billion budget deficit this year. The governor of the state even promised an appearance in the Terminator sequel if production remained in California. Nonetheless, the majority of the film was shot in New Mexico. Why? It was cheaper for Warner Brothers.

And California is not alone: states have handed out $1.8 billion in tax breaks and incentives to the entertainment industry over the past two years in an effort to woo business. Forty-one states currently offer some degree of tax break/incentive plan to attract or keep the TV and movie business.

Among them is North Carolina, currently facing a huge budget deficit. The state is introducing new taxes for its citizens all while pushing through new tax breaks targeted at the film and television industry. Will it work? Perhaps. North Carolina has been actively soliciting business from the entertainment industry for years – even since I was a kid. When I was in high school, my school band was chosen to portray a high school band in the movie, Hiding Out. We weren’t naive, we understood that we weren’t the best band out there, we were perhaps the cheapest. But we didn’t care: hailing from a poor county, we were able to use the “donation” from the film company to buy “new to us” uniforms for our band. The film went on to gross $7 million.

Since then, the city has played host to a number of television and movie projects including Dawson’s Creek and Matlock. But questions remain. Would those projects have chosen our town with or without tax breaks? Perhaps. Wilmington is a fairly low cost town with lots of affordable labor and beautiful scenery. That counts for something.

The North Carolina legislature thinks differently. Despite a giant hole in the budget, tax credits for film projects are still very much on the table with the state voting just this week to expand existing breaks. The reported impetus for the urgency? A Miley Cyrus project expected to film in North Carolina moved further south after Georgia offered the production company a better deal – double the tax credits.

As the states duke it out to position themselves as the most attractive place to film, they find themselves as odds with taxpayers who have been charged with the filling the budget gap in the interim. Proponents of the credits argue that the tax breaks will eventually pay for themselves because of the “extra” revenue generated when actors, extras and crew move in, visit their shops and eat at their restaurants (I will say that our albeit brief, weeklong experience was that those folks eat on a closed set, rarely venturing out into town).

Similarly, states argue that production can create new – albeit temporary – jobs for city workers. That’s not always the case: many production companies import a majority of their own sets, caterers, and crew. It is to be expected, quite frankly, since lighting crews, stunt people and other production positions require a level of training and expertise not always easily found.

So are the tax breaks paying off? Some states say yes. A recent report by Ernst and Young found that the local and state governments in and around New York City nearly doubled their investment on the entertainment industry, pulling in $1.90 for every $1.00 of tax credits. And New Mexico, which wooed The Terminator 2 away from California and just wrapped Jackie Chan’s The Spy Next Door, offers a slew of tax incentives: Ernst and Young claims that New Mexico brought in $1.50 for each dollar of tax credits they offered. Louisiana, buoyed by the success of The Curious Case of Benjamin Button, has such faith in the potential return on their investments that they recently introduced legislation to implement a more aggressive tax credit for movie and video productions.

Also pushing new aggressive new plans? Ohio, Massachusetts, Georgia and Texas. The legislators in these states are taking a gamble that their investments will work out.

Not all states are so confident. Connecticut has reported a loss on each dollar of investment in the industry. A recent bipartisan committee in the Michigan senate showed that the state was stung by huge losses as a result of its tax credit initiative: in particular, the refundable nature of their tax credit resulted in the state actually paying companies who reported a loss. And Wisconsin is actually looking for a way out of the tax credit incentives that they had promised before as the state grapples with finding a way to pay its bills.

Pennsylvania is also re-assessing its stance on film credits as it finds itself in a budget crisis. Successful projects recently filmed in the state include Baby Momma and Marley and Me. Proponents of expanding the credit point to those films as indicative of a pattern of growth in the area. However, opponents are quick to point to figures that show a net growth of less than $5 million after taking into consideration all related industries. Those same opponents argue that level of growth could have been generated through investing in long-term industry projects in the state – or by cutting tax for all businesses.

I’m not sure whether tax credits are a good solution long term for most states. I tend to believe that the amount of money being pumped out to an industry which grosses billions and billions of dollars each year could be better spent elsewhere – or put back in the pockets of taxpayers. But then, I also get the “ambient” benefit of having a movie industry in your state… I’ll admit to bar-hopping in Philly, looking for Brad Pitt when he was filming Twelve Monkeys because I had heard that he and Bruce Willis were hanging out downtown. And yes, my husband and I do watch Cold Case so that we can play “name that street.” There is a certain cachet associated with film and television projects that’s hard to value… But the real question is: is it worth it?

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Fix the Tax Code Friday: Tax Breaks for Investments

June 5, 2009 · 5 comments

It’s Fix the Tax Code Friday! Yesterday, I blogged about NC’s efforts to woo Apple and Google to the Tarheel state by passing corporate tax breaks directed at each of them. This is nothing new. In my own state of Pennsylvania, a new film tax credit is being touted in an effort to bring more filmmakers to the area. Similar programs have also been created in parts of Canada, like Vancouver, to attract moviemakers up the coast and away from California.

And sometimes the credits are not so much about attracting a company as keeping it from going (see almost every professional sports team stadium in the US).

The idea behind these tax credits is that bringing industry will create jobs. Those jobs will result in the need for more local services. And voila, it’s a ripple effect. But that doesn’t always happen. And when it does happen, it’s not always at the level that the lawmakers had hoped.

But sometimes it does work.

So today’s “Fix the Tax Code Friday” question is:

Are tax breaks targeted towards keeping or attracting certain companies worth it? And if so, does it matter that the individual taxpayers may have to pick up the slack through increased tax rates or decreased services in the short term if the plan is for increased revenue to the state (or locality) in the long term?

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