- The Washington Times - Tuesday, March 23, 2010

DENVER | Amazon.com, the nation’s largest online retailer, is waging a bare-knuckles campaign over sales-tax proposals pushed by cash-strapped state legislatures eager to tap into the lucrative online market.

A half-dozen state legislatures are considering bills this year that would require online retailers doing business with state-based “affiliates” to pay the state sales tax. Affiliates are independent Web site operators that earn revenue by posting links on their sites to retailers such as Amazon.com and Overstock.com.

The only state to approve a so-called “Amazon tax” so far this year is Colorado, and the reaction was swift. A week after Gov. Bill Ritter Jr., a Democrat, signed the bill, Amazon announced in a March 8 e-mail to its affiliates that it had pulled its advertising from all Colorado-based Web sites.

“We and many others strongly opposed this legislation, known as HB 10-1193, but it was enacted anyway,” said the Amazon e-mail. “There is a right way for Colorado to pursue its revenue goals, but this new law is a wrong way.”

Other online retailers are expected to do the same, which could spell the end of the state’s affiliate industry.

“[T]he many small businesses and solo entrepreneurs who make money off of Amazon’s affiliate program just lost a revenue stream (which, by the way, is used to employ people and pay state taxes),” Brad Feld of Boulder, a former Amazon affiliate, said in a post on his Web site, Feld Thoughts.

State Democrats, who control both houses of the General Assembly and passed the legislation over the objections of Republicans, blamed Amazon for trying to skirt its financial responsibilities. Estimates were that the 2.9 percent sales tax would result in $4.6 million in state revenue.

“Amazon has taken a disappointing — and completely unjustified — step of ending its relationship with associates,” Mr. Ritter said in a statement. “While Amazon is blaming a new state law for its action, the fact is that Amazon is simply trying to avoid compliance with Colorado law and is unfairly punishing Colorado businesses in the process.”

The liberal group ProgressNow Colorado has called for a boycott of Amazon, asking for supporters to avoid the retailer “until Amazon.com stops using Coloradans as pawns.”

“Today, with Colorado in the midst of the greatest fiscal crisis since the Great Depression, properly collecting taxes owed on these purchases means millions of dollars in badly needed revenue for schools, roads, and health care,” ProgressNow said in its boycott pledge.

Three states — New York, North Carolina and Rhode Island — passed Amazon taxes in previous legislative sessions. Amazon.com ended its affiliate programs in North Carolina and Rhode Island shortly after the laws were enacted.

The New York law was immediately challenged in court by Amazon.com and Overstock.com, and has never taken effect. That case is now being considered on appeal after the state prevailed at the trial level.

The California and Hawaii legislatures approved Amazon taxes in 2009, but the state’s Republican governors vetoed the bills. An effort by Virginia lawmakers to add an Amazon tax was killed in February by a state Senate committee.

That hasn’t stopped California Democrats from trying again. Another Amazon tax bill is making its way through the Legislature this year, even though Amazon.com and Overstock.com have threatened to pull the plug on their affiliate programs if the legislation passes.

Democrats decry the threats as blackmail. Retailers such as Amazon have “built an entire business model based on tax avoidance,” California Assemblyman Charles Calderon, who is chairman of the Assembly’s tax committee, told reporters.

Iowa, New Mexico and Vermont also are considering Amazon taxes this year.

Whether Amazon taxes result in revenue windfalls is another question. In a report released earlier this month, Joseph Henchman, tax counsel and director of state projects with the Tax Foundation, found that the Rhode Island tax added not a penny to the state treasury in its first six months. North Carolina hasn’t keep track of the tax’s impact.

Mr. Henchman cited Rhode Island state Treasurer Frank Caprio, who said, “The affiliate tax has hurt Rhode Island businesses and stifled their growth, as they’ve been shut out of some of the world’s largest marketplaces, and should be repealed immediately.”

An effort to repeal the Rhode Island tax is under way. Colorado state Sen. Greg Brophy, a Republican, has lobbied to eliminate his state’s Amazon tax, but says he’s getting nowhere with the majority leadership.

“It sure appears they’ve decided they’re not interested in repealing this,” said Mr. Brophy, who estimated that the tax would represent a financial hit for as many as 10,000 Colorado Web site operators. “They’re not going to raise any money. It’s going to cost them money.”

Amazon’s critics argue that online retailers that don’t pay state sales taxes have an unfair advantage over brick-and-mortar retailers, but Mr. Henchman said that’s not the case. While traditional businesses collect sales taxes based on the business’s location — a stable fact — Amazon taxes require retailers to collect sales tax based on the location of the customer. That would compel online vendors to track more than 8,000 constantly changing sales-tax rates and bases, placing a potentially insurmountable burden on small online operators.

Amazon has argued that the state taxes conflict with a 1992 Supreme Court ruling, which held that states could tax companies only if the companies have a physical presence in the state. State lawmakers in favor of the Amazon tax have taken the position that affiliates represent a physical presence.

The New York case ultimately may provide the high court with an opportunity to revisit the issue.

“This really is a federal matter, but until it gets to the Supreme Court, we shall see,” Mr. Henchman said.

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