A local company deals with the consequences of the new law

The passage of an internet sales tax in Connecticut earlier this year was highly controversial. Even the commissioner of the Department of Revenue Services warned the state might suffer economic damage. WNPR's J Holt brings us the story of one company dealing with the consequences of the new law.

Listen to the audio file

Warchol- "Go get it!" (Dog panting)

That's Josh Warchol and his dog Jesse. For the last three years, Josh has been senior engineer for a small software company called Fanzter

Warchol- "Our primary products are the website Coolspotters, which is celebrity association website, and then we have a number of mobile products including coolpapers and streaks."

Those mobile apps have been quite successful for the company- they've had over two million downloads so far. But an increasing amount of Fanzter's income this year has come from the celebrity association website, Coolspotters. The site serves as a platform for users to upload pictures of public figures and to identify the clothes and accessories they're wearing.

Warchol- "And it receives income from two primary directions, one is advertising on the site, And the second is from what we call commerce links that we provide on the products on our site so that if somebody sees a product that their favorite celebrity is wearing and they want to buy it, we have a link, and it takes them to a reputable retailer so they can purchase that."

Fanzter has relationships with over five hundred retailers, and receives commissions when Coolspotters users follow links to their sites to make purchases. but this spring, Connecticut passed a law that's become known as the Amazon tax. It uses affiliate relationships like Fanzter's as a basis for requiring out of state online vendors to collect and remit sales tax. The reaction from online retailers was simply to cancel affiliate contracts with Connecticut companies to avoid the tax. Fanzter got the word on July first.

LaBerge- "About 20 percent of our partners terminated immediately as a result of that."

That's Aaron LaBerge, Fanzter's cofounder and CEO.

LaBerge- "And unfortunately the percentage of people that terminated were some of the biggest drivers of our revenue, and so during the month of July our e-comerse revenue was down about 75%."

He'd envisioned there would be some decline after the tax became law, but hoped the sales they deliver to retailers, which he says are in the millions over the course of a year, would protect them, he contacted their larger vendors to try to persuade them to reinstate.

LaBerge- "They all essentially said the same thing, which was please let us know when you're operating out of a state that doesn't have internet sales tax, and we'll kindly reinstate you when you are."

LaBerge spoke to WNPR on the phone because his company is no longer based in Connecticut.

LaBerge- "Ultimately we settled on South Carolina, specifically the city of Charleston. Having to make this decision in such a short time period one of the biggest things that attracted us was the ability to move our company very quickly and be up and running in a short period of time."

When he says short period of time he's not joking. As of July 1st, LaBerge had no vision of Fanzter being located anywhere but Connecticut. Six weeks later, he and his employees loaded up a Uhaul on a Friday, and the company was up and running in downtown Charleston on Monday. The quick relocation was facilitated by a project directed by Ernest Andrade, the director of business development for the city of Charleston.

Andrade- "The Charleston Digital Corridor is a very comprehensive initiative, conceived and launched in 2001 to attract, nurture, and promote knowledge based enterprise. It's everything from talent management to networking opportunities to resource professionals who can be of help to the companies."

The most recent developments in the digital corridor are two business incubators. the first, launched in June 2009, has already graduated 16 companies, which have collectively garnered $22 million of capital investment. The second, flagship two, is the new home for Fanzter. It was just opened this June, and as of this week is completely full with 17 tenants, and is home to 62 jobs that didn't exist in Charleston three months ago.

Andrade- "If you're one of those communities that has put your money where your mouth is so to speak and started to demonstrate a business friendly environment. Then you have the opportunity to be successful."

(applause) Malloy- "Thank you, thank you very much. Thank you. Hey, listen, any day you can be at UConn is a good day...."

While Fanzter is finding its feet in South Carolina, along with 6 of its 8 employees, Governor Malloy was at UConn yesterday to announce the creation of the UConn Tech Park, and a likely 18 million dollars in startup finding from the state bond commision for the project. Catherine Smith is commissioner of the Department of Economic and Community Development, a body that's sometimes been criticized in the past for not reaching out to emerging companies. She says she's well aware of the Amazon tax issue,

Smith- "And it's very unfortunate, because this issue really is not about Connecticut, it's not about our business climate and our desire to grow business here. This really is about a national, interstate issue that needs to be resolved at the federal level."

And she says she hopes her department can intervene to help other companies stay in the state.

Smith "We are always open to talking to people and seeing if there's ways we can help out, so absolutely people should feel free to call decd and we'll take a look at their particular situation."

As for software engineer Josh Warchol, he'll continue to work for Fanzter remotely, from his home office in Plainville.

For WNPR, I'm J Holt