Business Pundit

Please, New York. Say you didn’t just invade one of our last bastions of unregulated commerce.

Businessweek has an article on how New York has decided to tax online transactions through e-tailers like Amazon.com. Amazon filed suit against the state, but recently lost.

While the debate over collecting sales tax has simmered between state governments and e-tailers for years, the slumping economy could help push the fracas to its boiling point. Twenty-nine states, including New York, have predicted revenue shortfalls in 2009. Tax lawyers say that could prompt states to follow New York’s lead. “There may be a ripple effect,” says Jon Zefi, a principal at accounting firm BDO Seidman, “which attacks the e-commerce business model.”

New York amended its law to say that having a New York-based affiliate or associate—such as bloggers or other Web sites that link to an e-tailer and are paid a percentage of the sale—is tantamount to having a presence in the state. The law affects dozens of other online players such as diamond retailer Blue Nile (NILE) and electronics site NewEgg. While Amazon is collecting the tax, Overstock has taken a different route, choosing to drop its 3,400 New York affiliates instead.

Yikes. If this ruling indeed opens the floodgates for other cash-hungry states to tax virtual transactions, companies may react like Overstock did and drop innumerable affiliates. Affiliate withdrawal, in turn, will cut into online ad revenue–the main source of profits–for Google and Yahoo.

So everyone loses: affiliates lose business, Google and Yahoo lose advertising income, big e-tailers lose the minions of affiliates who draw in users with their online ads.

The government wins, but by how much? It skims sales tax from consumer transactions, but dampens business for major online corporations in return. And it pushes small business owners out of a niche in order to support an inefficient state system.

There’s gotta be a better way.