March 2, 2011, 4:32 PM

Amazon warns it will leave California affiliates over tax law

The retailer will cut ties with affiliates if the state passes sales tax legislation.

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Amazon.com Inc. told California tax officials this week that it will cut ties with thousands of California affiliates if the state passes pending legislation requiring the online retailer to collect sales tax from California customers.

Amazon, contending that four bills pending in the California Legislature appear to be unconstitutional or would “construct Trojan horses” leading to unconstitutional regulation, said passage of any of the bills into law would compel the world’s largest online retailer to end its advertising relationships with more than 10,000 California-based participants in Amazon’s affiliate program. Amazon, No. 1 in the Internet Retailer Top 500 Guide, compensates program participants when they refer consumers who make purchases on Amazon.com.

State tax officials estimate that Amazon’s termination of its California affiliate program would slash by 50% the revenue the state expects to raise under the pending legislation, according to a statement by state senator George Runner, who is a member of the state’s Board of Equalization, the state agency that oversees sales tax collection.

Like several other states facing steep revenue shortfalls, California is looking to get sales tax revenue from out-of-state online retailers who don’t have a physical presence in the state. According to a 1992 U.S. Supreme Court ruling, retailers can’t be required to collect sales tax in states where they operate no physical facilities, such as stores or distribution centers. California’s pending legislation, however, would consider web site affiliates as constituting a physical presence requiring e-retailers to collect sales tax.

Amazon argues that, instead of increasing tax revenue for California, the proposed legislation would reduce incoming revenue. “These bills would provide no new tax revenue collected by Amazon or others who sever their relationships with California-based advertisers,” Paul Misener, Amazon’s vice president for global public policy, says in a letter to Senator Runner, adding: “California consumers would still be able to purchase online at www.amazon.com from Amazon’s retail business, so these bills would only deny California-based organizations and individuals the advertising fees they currently receive from out-of-state retailers and, ironically, California’s general fund could suffer a net loss in revenue as affiliates pay less income tax or move out of the state.”

A spokesman for Runner, who opposes the pending legislation, notes the 25,000 online affiliates based in California paid a total of $124 million in state income taxes last year.

Misener adds in his letter, a copy of which was received by Internet Retailer, that Amazon has already terminated its relationships with affiliates in three other states—North Carolina, Rhode Island and Colorado—that have enacted legislation within the past year aimed at forcing online retailers to collect sales tax. “Amazon has terminated its advertising contracts with in-state affiliates, and has collected no sales tax for any of these states, nor paid any referral fees since then to any in-state affiliates,” Misener says.

 

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