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Amazon Drop-Kicks Colorado Affiliates

By Glenn Fleishman March 9, 2010

Yesterday, Amazon.com gave Colorado the boot from Amazon's Associates program—a program that lets local online retailers earn a share of the revenue when it refers customers to Amazon.

Here's why Amazon dropped its Colorado associates (more commonly called "affiliates"): Amazon prefers not to collect sales tax from its customers outside a very few states in which it has warehouses or offices. States, faced with budget crunches—like Colorado— look to online retailers as tornadoes of cash being suctioned out and swirling the money away. In epochal revenue shortfall years, states want more tax revenue without tax increases.

This battle between "etailers" and states has been raging since nearly the dawn of online commerce. The latest victims in the battle are Colorado residents.

I wrote about this sales-tax battle back in July in "Nexus Perplexus," in which I explained the intricacies of how federal and state law interact over whether a company does actual business in a state, a so-called "nexus."

Amazon wants to claim the high ground, and says such laws are unconstitutional. States claim that affiliates represent Amazon and have a contract to do so, and are thus creating a business location for Amazon. Amazon says that because affiliates don't handle physical goods, and have only a loose relationship—less than that of agents, say--states are overreaching into federal territory.

My unpopular stance on this topic, perhaps bolstered by the fact that as a Washington State resident I already have sales tax collected for all my Amazon purchases, is that online retailers should be required to collect sales tax and remit to each state in which they do business.

Despite the advantage to consumers in lower prices, or at least offering arbitrage, consumers are robbing Peter to pay Paul. The sales tax they don't pay on a purchase means less money that's going to infrastructure, schools, and services.

In the issue at hand, Colorado joined North Carolina, New York, and Rhode Island as states Amazon is fueding with over this issue. Rhode Island and North Carolina are currently excluded from the affiliates program, but not New York. (Current affiliates in Colorado get paid out to date, but can't earn new fees.)

Amazon lost a lawsuit challenging the constitutionality of New York's law, passed in 2008, but continues to allow affiliates in that state, likely due to relationships with New York City firms. It's appealing the decision.

Declan McCullagh at CNET News.com reports that 15 other states have "considered or are considering" similar laws. These laws don't precisely target Amazon, as many other firms have affiliate offers, but Amazon is clearly has the largest number of such partners and is the largest online retailer without any physical stores.

Walmart.com, BN.com (Barnes & Noble), and other competitors with physical operations already pay sales tax in every state that requires it (for large chains, that's every state that has sales tax). BN.com initially attempted to avoid sales tax, being constituted as a separate division, but the company capitulated quickly.

Amazon does business in several states with sales tax, including Washington, Kansas, Kentucky, and North Dakota. The company located its west-coast mega-warehouse in Nevada to avoid a number of California taxes, including sales, inventory, payroll, and others.
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