Amazon Terminates Affiliates In Battle Over State Taxes

The battle between Amazon and certain individual US states continues to escalate, with a number of small business affiliates caught in between. Over the last few years, a number of cash-strapped states have attempted to hold Amazon liable for sales tax based on its business in each area. While Amazon isn't required to pay taxes in a state where it has no presence, state legislatures have argued that affiliate relationships between Amazon and state residents constitutes a 'presence', which can then be taxed.

Amazon's respose to such attempts has been to terminate its relationships with the affiliates in question until the tax issues are resolved. The company has yet to blink in what amounts to a high-speed game of chicken--Amazon has terminated agreements in Illinois, Colorado, North Carolina, and Rhode Island. The most recent termination affects Conneticut and Arkansas; Amazon is also threatening to terminate affiliate relationships in California.  

The letter sent from the company to its affiliates reads, in part:  "We opposed this new tax law because it is unconstitutional and counterproductive," Amazon said in the letter to Connecticut affiliates. "It was supported by big-box retailers, most of which are based outside Connecticut, that seek to harm the affiliate advertising programs of their competitors. Similar legislation in other states has led to job and income losses, and little, if any, new tax revenue."

One potential solution is known as the Streamlined Sales Tax Initiative. The SSTI "minimizes costs and administrative burdens on retailers that collect sales tax, particularly retailers operating in multiple states.  It encourages "remote sellers" selling over the Internet and by mail order to collect tax on sales to customers living in the Streamlined states.  It levels the playing field so that local "brick-and-mortar" stores and remote sellers operate under the same rules. This Agreement ensures that all retailers can conduct their business in a fair, competitive environment."

At present, 24 of the 44 states covered by the agreement have become members with some degree of participation.

Company CEO Jeff Bezos has weighed in on the issue himself, arguing that previous judicial decisions that determined mail order companies aren't required to collect sales tax in most situations apply equally to the Internet. He calls for the issue to be settled by appropriate federal legislation and vows to continue shutting down affiliate programs in any state that attempts to collect taxes through them.

Assuming the company is willing to make good on its threat, the states have precious little to gain. Terminating affiliate relationships can greatly damage a relatively small number of individuals who are citizens of the states in question. State governments that pursue Amazon run the risk of upsetting individual citizens who have already borne some of the brunt of the recession these past several years. It's virtually certain that a number of websites need Amazon more than Amazon needs them and will therefore look unkindly on the state's legislation.