March 31, 2011, 12:00 AM

Amazon cuts affiliate ties over sales tax, and retail chain rivals try to take its place

As the world’s largest web-only retailer stops paying commissions on customers it gets from affiliate web sites because of sales tax laws, rivals like Wal-Mart, Sears and Barnes & Noble are offering to pick up those fee-paying relationships with affiliates.

Zak Stambor

Managing Editor

Lead Photo

It's not easy being the world's largest web-only retailer. Especially when a growing number of states pass laws that threaten your business model and your biggest competitors seek to take advantage of the new laws to take your place with business partners.

That's the situation facing Amazon.com Inc., which has refused to go along with laws in money-starved states that require Amazon—and any e-retailer with affiliates in those states—to collect sales tax on purchases by state residents. Those laws could remove the price advantage Amazon and other web-only retailers have in states where they don't collect sales tax.

Instead, Amazon has ceased paying referral fees to its affiliates in North Carolina, Rhode Island and Colorado, and it sent a letter last month to California saying it would do the same there with its 10,000 affiliates if the state passes it own version of what's often called the "Amazon Tax," so named because of the laws' main target.

Overstock.com Inc. has also said it will cut financial ties with California affiliates if the legislation is passed. "If the proposition is to collect taxes in the state of California because you have an affiliate there, the simple answer is no, we don't," says Mark Griffin, Overstock's vice president and general counsel. Amazon declined to comment.

Big retail chains that already must collect sales tax in most states because their stores give them a nationwide physical presence, are swooping in to woo Amazon affiliates. Such chains as Wal-Mart Stores Inc., Sears Holdings Corp. and Barnes & Noble Inc. have publicly offered to pay for traffic from affiliates cut by Amazon and Overstock. Wal-Mart "is committed to supporting the affiliate programs which help to drive Walmart.com's online business," the company says. Wal-Mart says it has about 200 affiliates in California.

Sears scolds Amazon

Sears' invitation, from Imran Jooma, president of Sears eCommerce, says Amazon is turning its back on its affiliates and encourages them to join Sears' network of more than 6,500 affiliates nationwide. "As states continue to grapple with increasing budget deficits and businesses, large and small, slowly make their way out of one of the worst economic declines in recent history—Amazon turns its back on its customers, affiliate partners and the community to maintain an unfair competitive advantage that ultimately puts Amazon's customers at risk," Jooma writes.

Wal-Mart and Sears are required to collect sales tax on products sold on Walmart.com and Sears.com because they have physical stores in all states. Raul Vazquez, Wal-Mart's executive vice president of global e-commerce, says the retailer supports the California legislation. "We are committed to the communities where our associates and our customers reside and raise their families," he says.

Retail chains typically support laws that would require online retailers to collect sales tax, as does the National Retail Federation, the largest trade association of U.S. retailers.

In Illinois, the latest state to pass an affiliate law, Gov. Pat Quinn contends it helps create a level playing field among retailers and will provide the state much-needed revenue.

Affiliates consider options

Some affiliate businesses, however, say they may leave the state.

Illinois-based affiliate marketing company FatWallet.com says it's seriously considering moving to Wisconsin. FatWallet owner and founder Tim Storm says he expects the law, and other e-retailers' expected moves to end relationships with affiliates in Illinois, will affect 30% to 40% of FatWallet's top-line revenue. He says he expects more e-retailers affected by the bill will follow Amazon's lead and end their Illinois affiliate relationships. Overstock.com has said it will end it relationships with Illinois affiliates.

FatWallet, based in Rockton, Ill., is near the Illinois-Wisconsin state line. The company has 55 employees. "The simple answer for us is that we can hop five minutes north and we're in Wisconsin," Storm says. "Is that the best answer? We don't know yet, but we want to be able to analyze our options. I have to do what is right by our employees."

Scott Kluth, owner of Chicago-based affiliate marketing company CouponCabin.com, says the new law could cost him a third of his revenue. He says he's considering moving to Indiana

zak@verticalwebmedia.com

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