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Amazon Drops NC, RI Affiliates as Tax Looms



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Amazon has shuttered its Associates affiliate programs in North Carolina and Rhode Island, a move enabling it to avoid having to collect state sales taxes through new laws likely to go into effect within days.

However, the decision also means that the states' Amazon (NASDAQ: AMZN) affiliates -- Web site operators who place links to Amazon merchandise on their pages in return for a percentage of sales -- will be left out in the cold.

The Internet's largest retailer late last week began sending notices to its North Carolina affiliates, warning them that their participation in Amazon's affiliate program would be ceasing as "a direct result of the unconstitutional tax collection scheme expected to be passed any day now by the North Carolina state legislature (the General Assembly) and signed by the governor."

[cob:Pull_Quote]The North Carolina legislature is weighing a state budget that, if approved by July 1, would require companies like Amazon to collect taxes on sales in the state. According to lawmakers, Associates in the state equate to Amazon having a physical presence there -- enough to justify requiring Amazon to collect sales taxes.

Amazon, for its part, has long disagreed that affiliates count as a physical presence, like a warehouse or shipping center. And in response, it's pulling the plug on its Associates program in the state.

"As a result, we will no longer pay any referral fees for customers referred to Amazon.com," the company said in its notice to affiliates. "We were forced to take this unfortunate action in anticipation of actual enactment because of uncertainties surrounding the legislation's effective date."

Amazon today also sent similar notices to affiliates in Rhode Island, which is close to passage of a budget that will similarly count Associates as a physical presence in the state -- thereby requiring Amazon to collect sales taxes for sales to residents there as well.

"This is a direct result of the unconstitutional tax collection scheme passed by the Rhode Island General Assembly with a veto-proof majority," the company said in its notice to Associates.

More states eye e-commerce taxes

The moves -- which also impact affiliates for Endless.com, an Amazon site focusing on shoes and handbags -- come as a growing number of cash-strapped states mull ways to tap into the billions of dollars trading hands through e-commerce.

"We really didn't feel we had much of a choice," Amazon spokesperson Patty Smith told InternetNews.com, adding that if Amazon had continued to do business with Associates in the states, it would have to "ignore that the U.S. Supreme Court has said this type of legislation is unconstitutional."

According to a 1992 U.S. Supreme Court ruling, Quill v. North Dakota, a retailer must have a physical presence within a state before it's responsible for collecting state sales taxes. Amazon has routinely cited the ruling in challenging states' categorization of affiliates as a physical presence.

Other e-commerce giants, like eBay (NASDAQ: EBAY), have also sparred with state and national legislators over e-commerce taxation, arguing that calculating local taxes for every purchase made nationwide would be an expensive and time-consuming proposition.

The legislation in both North Carolina and Rhode Island is similar to bills or state budgets being discussed in California and Hawaii -- and all follow a model established last year by New York.

[cob:Special_Report]Last year, New York passed a law requiring online merchants to collect taxes on purchases shipped to the state. Amazon and Overstock filed suit against that law, lost, and have since appealed.

Overstock has since ended its affiliate program in New York, while Amazon has not -- although it continues to maintain its Associates program there.

"We are currently litigating in New York state," Amazon's Smith said. "Once the law went into effect in June of last year, we of course began complying ... While it is still unresolved, we are complying with the law."

Smith also said that Amazon already collects sales tax in states where it maintains a physical presence -- in Washington, North Dakota, Kentucky and Kansas.

"Each state is different," she added. "States such as Minnesota, Maryland and Tennessee all considered similar proposals to what North Carolina has, and they ultimately rejected that type of legislation, in part because they realized the negative effect it would have on residents of their state."

"Perhaps, too ... they realized it would be going against the U.S. Supreme Court, which says it places an unconstitutional burden on interstate commerce to require a seller without a physical presence in that state to collect a sales tax on sales to buyers in that state," she said.

Affiliates in the crossfire

Amazon's impacted affiliates, meanwhile, are lashing out at their state lawmakers, with some Associates joining an online petitions to protest the taxes.

Others, however, point the finger at Amazon.

"I've spoken with my local [North Carolina] representative. Both sides have points, in truth," another Associate said on Amazon's discussion forums for affiliates. "I'm most upset with Amazon due to the way they communicated all of this with their associates. Not terribly professional in my opinion. That's why I yanking all references to Amazon from my site."

Still others are recommending ways to skirt the restriction.

"Buy a mailbox in a nearby state," another Associate added.

For its part, Amazon has placed blame squarely at the feet of legislators.

"The unfortunate consequences of this legislation on North Carolina residents like you were explained in detail to key senators and representatives in Raleigh, including the leadership of the Senate, House, and both chambers' finance committees," the company said in an earlier note to Associates. "Other states, including Maryland, Minnesota, and Tennessee, considered nearly identical schemes, but rejected these proposals largely because of the adverse impact on their states' residents."

Spokespeople for the company also said that the closure of its affiliate programs in Rhode Island and North Carolina may not be permanent.

"Should [legislators] appeal this law, we would be happy to reinstate the Associates program," Smith said.

Update adds comments from Amazon.