The states are eyeing Internet retailer taxes as a way to balance budgets and giants like Amazon are in the crosshairs. The latest state tax battleground is Colorado, but the fight is likely to spread.
Amazon's response to Colorado's state tax issue---Governor Bill Ritter signed a bill that puts new restrictions and taxes on out-of-state retailers like Amazon---has been consistent. When things go against Amazon the retailer cuts its affiliate programs in that state.
As CNet's Declan McCullagh notes, 15 other states have considered laws targeting Amazon that don't charge sales taxes. A 1992 Supreme Court ruling says that retailers can't be forced to collect state taxes if they don't have offices in those states. States have looked at affiliate programs as offices to trigger tax collections. Not so surprisingly, Amazon's first move is to nix state affiliate programs.
Brad Feld learned the drill the hard way. Feld posted Amazon's letter, that went like this in part:
We are writing from the Amazon Associates Program to inform you that the Colorado government recently enacted a law to impose sales tax regulations on online retailers. The regulations are burdensome and no other state has similar rules....Regrettably, as a result of the new law, we have decided to stop advertising through Associates based in Colorado. We plan to continue to sell to Colorado residents, however, and will advertise through other channels, including through Associates based in other states.
Amazon then maintains that Colorado's rules are unconstitutional and other experts seem to agree.
As previously reported, Amazon's move to nuke affiliate programs actually boosts its earnings. Affiliate programs are marketing expenses that would disappear if tax happy states proceed. In the end, you could argue that state taxes and Amazon's move to cut affiliates ultimately hurt small businesses.
The open question here is whether states ultimately lose revenue with these tax policies. Every state has a different tax wrinkle so compliance gets a bit ridiculous. The broader question is whether the lack of state taxes would be a big deterrent to e-commerce in general.
According to Forrester, Web shopping will account for 8 percent of total retail sales by 2014. It's doubtful that tax flaps are going to stop that march, but this fight is just going to escalate.