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Telarc, Classic Records, AIX, Cisco Music, Elusive Disc, Reference Recordings, and M•A Recordings have all pulled out of CES 2007, citing new restrictions on sales of merchandise that they feel to be unacceptable. Chesky remains undecided. Music Direct, May Audio, and Acoustic Sounds will exhibit, but will not sell product. Only 5.1 Marketing and Sales is currently committed to selling music.

Reasons given for the pullout vary from label to label. One spokesperson for several companies initially opined, "Music is now [considered] 'software' and not welcome in the Consumer Electronics Show." Others complained of the change of venue from the Alexis Park Resort to the Venetian.

Telarc addressed numerous issues in a statement issued September 28: "Telarc has chosen not to participate in CES 2007 because of the lack of attendance at mid-week shows, combined with new limitations on sales. We feel these restrictions disconnect our relationship with our customers and erode the financial viability of exhibiting our product."

The cause for the ruckus stems from a long-standing problem at CES. While the Show's controlling body, the CEA, has always officially forbidden the sale of merchandise by exhibitors, due to the necessity to collect Nevada state sales tax, CES management was unable to control sales by high-end exhibitors at the open, isolated Alexis Park Resort. As a result, exhibitors of music and accessories (as well as some audio distributors who sold demo units at the conclusion of the show) managed to sell merchandise below the radar of the tax collectors.

For 2007, however, CES has switched venues for what it terms "high-performance audio." For the first time, high-performance audio and some home theater will be consolidated into one high-profile venue, The Venetian Hotel. Because of the closely controlled access to the hotel venue, CEA can no longer look the other way as merchandise is sold without sales tax.

"The bottom line," explains Karen Chupka, senior vice president of CES Events and Conferences, "is that we've always had a no-selling policy. Nevada tax commissioners come to the show. They have told us that, if they discover us in violation, every exhibitor will have to apply for a Nevada business license in order to exhibit.

"Can you imagine trying to explain to a Chinese company why they need to go to the State of Nevada and get a business license in order to do business in the State of Nevada? We have no choice but to take the state's tax laws seriously and close booths down if they sell, rather than jeopardize every booth on the floor."

Chupka and CES thus came up with what they intended as a relatively painless compromise that would allow sale of music at CES. As show management, CES has a Nevada state business license that enables sale of CES merchandise at special show stores. Adopting this arrangement to music sales, CES, rather than music vendors, will now be responsible for collecting payment and sales tax for music sold at The Venetian. This will guarantee payment of sales tax to Nevada authorities.

Music vendors are now required to supply CES with a list of inventory available for sale, as well as the pricing. When people wish to purchase music on display, vendors will hand them a merchandise invoice and direct them to the CES Music Store. Once purchasers pay for the merchandise, they must return to the vendor to collect their goodies.

After the show, vendors will pay CES a newly instituted overhead and processing fee of 1% (lowered from an initially announced fee of 2%) of total product sales, net of Nevada sales tax. To cover any possible credit-card charge-backs, CES will refund 85% of the company's sales within 30 days of the show and the remaining 15% within 90 days.

According to one company spokesperson, the CES representative who initially presented this plan to music vendors did so in a manner that struck some as uncompromising. Reaction was equally absolute.

One vendor feared that the CEA sales counter would be so far away from the company's display as to inhibit sales. "People are only willing to go through so many hoops to purchase," he complained.

Another told Stereophile, "The transition from the Alexis Park to the Venetian is fraught with a number of possible miscalculations and draconian policies that may not bode well for the future of CES."

A third complained of the inability to sell product directly, and feared that vendors would not be able to give away promo copies without people being stopped at the door and merchandise confiscated. The prospect of reporting different pricing for different categories of customers (dealers planning to resell as opposed to people purchasing for personal use) seemed unworkable.

"CES to their credit did try to make something work for us," said Marcia Johnson of Reference Recordings. "But I don't think they fully understand how we do business and why we are there. My brain could not wrap around how we could make this work.

"If we had had knowledge of the new system months earlier, I would have tried to arrange a display where a number of independent labels could pool together to give out literature and network. But I couldn't put it together in time. By the following show, I hope we will have put together a cooperative group of music companies to do a cost-effective, media-effective display that need not involve selling in the way we did previously."

Several company representatives dispute Chupka's assertion that it would be impossible to require a Nevada sales tax permit from all vendors. "We have exhibited at other shows that required this exact thing," said one. "It is not hard or expensive to get a temporary sales tax permit, and CES could have facilitated it by including the forms in its contract package."

When I shared vendors' misgivings with Chupka, she seemed open to doing all she could to make the compromise workable.

"The store sales counter will be no more than 10 feet from the cash register," she said. [Note: It may be more like 30 feet]. "We designed the set-up so that booths would be immediately adjacent. The cashiers will be at the center of a row of 10 x 10 booths. We are going to have more cashiers than we usually have in the lobby. People won't have to walk very far or wait in long lines to complete transactions."

Chupka also assured me that vendors will be allowed to give away comp copies, conduct booth giveaways, and take orders for future delivery. Music can even be sold wholesale or at customary show discount pricing. Selling accessories and floor samples, however, is strictly verboten. No merchandise can be removed from the convention show floor. (There was no way to control this at the Alexis Park, given the venue's multiple entries and exits).

"We were not intending to be the police," Chupka said. "We will find a way to identify complementary giveaways so people will not be stopped at the door. Vendors can even add to their sales inventory as the show proceeds."

Aware of widespread alienation, CES initiated two conference calls to labels on September 18 to explain its position and announce fee alterations to its original sales agreement. Nothing has convinced vendors to come back on board.