New tax law sends Valore Books packing
Internet company’s textbook distributors feared being forced to collect sales tax
Valore Books started small in 2002, when a Fredonia State College student thought he could make money buying and reselling textbooks that the campus bookstore didn’t want.
It grew over the past six years into a major online marketplace for used textbooks, generating millions of dollars in revenue.
However, any future expansion and hiring at the Buffalo tech company will take place thousands of miles away, in San Diego.
“We were thinking about moving as it was. But the tax law was the tipping point, and we said, ‘We’ve got to move right now,’ ” said Bobby Brannigan, president and founder of Valore Books.
“Buffalo’s a good place,” he said. “I love the people there. But from a business standpoint, it’s a move that needed to be done.”
Valore’s cross-country move is in part a story of the unintended consequences of a change in the New York State tax law.
The state, in an attempt to collect millions of dollars more in sales tax, this year passed a law that forced many large Web retailers to collect the tax on sales to buyers in the state.
The “Amazon tax” affected out-ofstate retailers that worked through small companies or nonprofits based in New York.
Many responded by dropping their affiliates in the state.
“That’s basically the option: Be a tax collector or get out. There are other companies that have just quit the state,” said Joe Henchman, tax counsel for the Tax Foundation, a nonprofit, nonpartisan research organization in Washington, D. C.
This has severely hurt the affiliates that made money through sales commissions from the retailers. And it prompted Valore to move out of state after some of the textbook distributors that listed on the company’s Web site feared they’d have to start collecting the sales tax.
Since the law was changed, Amazon. com and Overstock.com have filed suit and affiliates have banded together to win back their business.
Melanie Seery, who ran several Web sites as an affiliate for out-ofstate retailers, said her business had been profitable, but “now, not so much. As my accountant said, ‘I don’t have to worry about paying income tax.’ ”
There’s no overarching federal law allowing for the taxation of online transactions, accountants and tax lawyers said.
The Supreme Court has held, as recently as 1992, that a state can only tax a company’s sales if that company has a minimal physical presence in that state.
“Historically, what the Supreme Court has held is that it would be an unfair burden on interstate commerce for every business to have to collect every state’s, every locality’s, sales tax,” said David R. Barrett, partner in charge of tax for the Freed Maxick & Battaglia accounting firm in Buffalo.
The “Amazon tax” went into effect in April.
New York is arguing that out-ofstate retailers working through affiliates based in New York have a physical presence in the state and must collect sales tax on transactions.
“I think New York’s approach is pretty aggressive,” said Martha L. Salzman, who teaches business law at the University at Buffalo School of Management.
Affiliates typically post on their Web sites ads or descriptions for products sold by an out-of-state retailer. They receive a commission when someone clicks on the link to the retailer’s site and ends up buying the advertised item.
Valore Books also makes money through commissions on transactions conducted through the company’s Web site.
Brannigan started Valore in 2002 with 12 Fredonia peers.
At the time, if the campus bookstore didn’t want to buy back a textbook — because it wasn’t being used by a Fredonia professor the next semester — the student owner was out of luck.
But Brannigan thought he could start a company that bought back as many textbooks as possible if he found students elsewhere who needed them.
The company’s Web site, www.valorebooks.com , acts as an online clearinghouse for the sale and purchase of hundreds of thousands of college textbooks each year. This spring, officials from several of the largest distributors that sell books through Valore’s Web site told Valore they believed they would have to collect sales tax on transactions involving New Yorkers.
The companies believed that Valore was treated as an affiliate under the new tax law.
The company already was considering a move, because Brannigan said Valore couldn’t find experienced IT programmers and executives here.
They had intended to keep customer service and a few other operations in Buffalo.
However, when the law changed, and several large distributors dropped their listings, Brannigan decided to move everything immediately, he said.
Valore moved its entire online division and five employees to San Diego in July.
“As soon as we moved, they relisted with us,” he said.
Valore spun off the division that operates its stores into a new company, Bucks 4 Books.
The stores — 10 total, with more planned — buy back books from students and Bucks 4 Books then resells them on Valore and other Web sites.
Interestingly, the Amazon tax doesn’t apply to Valore’s distributors. That’s because new and used college textbooks are exempt from sales tax in New York, said Tom Bergin, spokesman for the State Department of Taxation and Finance.
Other companies that have affiliates in New York, such as Amazon.com, kept them and started collecting the sales tax on transactions in the state.
But many, including Overstock. com, dropped their affiliates so that they can continue to do business in New York without having to collect the sales tax on those transactions.
“The affiliates are the ones who are going to be hurt the most,” said Mark S. Klein, a Hodgson Russ partner and tax lawyer who is representing a group of affiliates.
Affiliates have lost 20 percent to 90 percent of their income since May as companies have dropped them rather than collect the sales tax on transactions in the state, said Seery, an organizer of the NY Affiliate Voice group.
This means the state won’t collect anywhere near the $47 million it had anticipated making under the change in law, she said.
Many of the affiliates are banding together, exploring their options and trying to educate out-of-state retailers that they can take steps to make sure they aren’t affected by the law.
And Overstock.com and Amazon. com have challenged the law in court, but it’s too late for Valore Books.
“They’re serving over half a million students. The company’s getting big. And they’re just about to make a lot of hires — a lot of big hires — and they should be Buffalo people, but they’re going to be in California now, so it is frustrating,” said Chris Howard, chief executive officer of Bucks 4 Books.
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