As revenue-hungry states eye Internet retailers as possible sources of new taxes, Amazon.com Inc. is firing back.
Already, the nation's largest Internet retailer has cut ties with its affiliate websites in two states to avoid legislation that would require the company to collect sales taxes from its customers there. And it is fighting similar tax proposals in several other states, including California.
At issue is the company's Associates Program, which lets thousands of small businesses earn money by posting ads for Amazon and its products on their websites. If a consumer clicks through and buys something, Amazon gives a referral fee -- as much as a 15% cut on the sale -- to the third-party website.
Currently, states can levy sales taxes on Internet commerce only when the Web company has a "physical presence" in the state, such as a corporate office, store or warehouse.
Seattle-based Amazon, for instance, must charge sales taxes on purchases made online by Washington state residents. But Amazon customers in nearly every other state don't have to pay sales taxes when they buy from the site.
Now several states are arguing that these third-party advertising contracts at Amazon and other Internet retailers constitute a physical presence. The states are looking to those companies to charge sales taxes.
On Monday, Amazon cut its ties with Rhode Island affiliates after the state's Assembly passed legislation requiring the company to collect taxes; three days earlier, Amazon canceled its program in North Carolina.
"We feel that the way the state legislatures are going about this is inappropriate," said Patty Smith, an Amazon spokeswoman. "It places an unconstitutional burden on interstate commerce for a state to require a seller without a physical presence in that state to collect sales tax."
Similar legislation is awaiting action in California's state government, prompting Amazon to send a letter to Gov. Arnold Schwarzenegger last week saying it opposed the move.
"If this new tax collection scheme were enacted, Amazon would have little choice but to end its advertising relationships with California-based participants in the Amazon 'Associates Program,' " the letter said. "Thus, this provision would provide no new tax revenue collected by Amazon or others who sever their relationships with California-based advertisers."
On Monday, Schwarzenegger spokeswoman Rachel Cameron said, "The governor has been clear that he is not supportive of new tax increases to solving the budget problem."
Other well-known Internet retailers, including Overstock.com Inc., have pledged to take similar actions. The Salt Lake City-based retailer runs an affiliate program that is similar to Amazon's and is preparing to cancel its programs in North Carolina and Rhode Island, Overstock.com President Jonathan Johnson said.
"We turned off over 3,400 affiliates in New York and we're looking at doing it in every state that's got that kind of legislation proposed," Johnson said. "In our view, it's just not worth it to run an affiliate program where the state's going to make us a tax collector."
Supporters of the legislation say the status quo gives out-of-state retailers an unfair advantage over local merchants and argue that the companies' advertising affiliates clearly indicate a connection, or nexus, between the retailers and the states.
"What the affiliate marketing programs are, are people who are under contract through Amazon who are being paid on commission for referring sales to Amazon," said Lenny Goldberg, executive director at the California Tax Reform Assn. in Sacramento, which supports requiring retailers to charge sales taxes.
"That's drop-dead nexus," he said.
Opponents argue that collecting sales taxes would be both burdensome and costly for Internet retailers; for consumers, it would raise the total cost of purchases. Thousands of people who rely on commission fees would be affected by the programs' cancellation.
Fred Nicely, tax counsel with the Washington-based Council on State Taxation, called the states' efforts to tax shoppers based on affiliate programs "constitutionally suspect."
"This is not door-to-door sales, where someone is knocking on your door, showing you the goods, demonstrating the goods," he said. "This is passive advertising, which the U.S. Supreme Court has said is not enough of a presence in the state to require a remote seller to have to collect a state sales tax."
Nicely said many states are pushing Internet retailers to charge sales taxes as a way to help manage significant budget problems.
"I think they're doing everything they can to get revenue because the states are hurting right now," he said. "We're in a down economy and they're thinking of alternative revenue sources, and this is something they see as potentially easy money."