Amazon.com Ends Affiliate Relationships In Colorado

Colorado enacted an Amazon.com law that would impose new filing and reporting requirements on affiliates of out-of-state companies.

Amazon.com is ending its affiliate program for Colorado businesses. I'm sure that others, like Overstock.com will follow. Rather than deal with the headache of the filing and reporting requirements, they'll simply take the business elsewhere. And it's going to end up seriously hurting Colorado businesses that do business via Amazon.com who should have no one to blame but the Colorado politicians who enacted this law.

States are finding that every new effort to impose taxes, especially on out of state businesses, is not leading to new revenues as projected, but rather businesses opting out of doing business in the state. That hits the bottom line for the states and the individuals running these businesses.

Colorado Governor Bill Ritter can whine about Amazon.com ending the affiliate program in his state, but he has no one to blame but himself for pushing this law. If the state doesn't take in as much revenue from in-state businesses because they aren't doing as much business because of the lost affiliate status, that's on the enactment of the affiliate nexus bill. It's on him.

Amazon.com made the business decision that it doesn't want to incur additional regulatory burdens and tax obligations. That's completely within its rights as a business. Ending the relationship with the Colorado affiliates prevents it from being hit with that tax burden. End the tax burden, and Amazon.com goes back to doing business in Colorado and the Colorado affiliates can get back to making money that ends up being taxed in the state (under the gross income tax or the corporate income tax). The problem for Amazon is that they're taking a publicity hit because they didn't notify their affiliates in a timely fashion and they look like a bad guy here. As the Denver Post reports:

The affiliates, ranging from online booksellers to individual bloggers who advertise Amazon on their websites to receive a commission in return, were both angry and confused by the move. And some say they were not notified.

"We had to find out from others, and we will lose 10 percent of our (revenues)," said Judith Briles, chief executive officer of Mile High Press, a book publisher in Aurora. "Amazon is going to get horrendous publicity for this. But there are two bad guys: Amazon and the lawmakers who moved this legislation through so fast."

Jeannine Crooks of Parker runs a number of online sites that refer customers to bigger retailers. She only recently became affiliated with Amazon, but said she will have to find other online stores that carry the products she offers. That may not be easy if other online merchants follow Amazon's lead.

"It's putting our entire industry at risk," she said.

At issue is a recent law enacted by legislators mandating Amazon and other retailers notify their online shoppers they must pay a 2.9 percent sales tax on purchases. Designed to offset a massive budget shortfall, it is expected to generate $5 million.

Amazon.com, Overstock.com and other online retailers that sell across state borders do not regularly collect sales taxes, though businesses with physical stores in Colorado must. They have fought attempts in other states to enforce collections of taxes on their products.

After Amazon criticized earlier versions of the Colorado bill, it was modified by law makers to ensure that affiliates did not bear any regulation burden.

On Monday, Amazon sent e-mail messages to some affiliates saying lawmakers "clearly intended to increase the compliance burden to a point where online retailers will be induced to voluntarily collect Colorado sales tax — a course we won't take."

Colorado should have seen what has happened in Rhode Island since the passage of its own version of the Amazon.com law. It's hurt business and tax revenues aren't meeting projections.

In fact, the nation’s first few Amazon taxes have not produced any revenue at all, and there is some evidence of lost revenue. For instance, Rhode Island has seen no additional sales tax revenue from its Amazon tax, and because Amazon reacted by discontinuing its affiliate program, Rhode Islanders are earning less income and paying less income tax. Amazon taxes also do not “level the playing field” between brick-and-mortar and online businesses; the laws actually mandate disparate burdens on online businesses. Litigation over the constitutionality of Amazon taxes is ongoing, with scholars on the left and right disputing their wisdom and legality.

In the mad dash for tax revenues to close massive budget deficits, states are turning to the Internet for a quick hit, and the expected revenues aren't being realized. That has serious consequences down the line, since in-state businesses are losing customers and their revenues are down, further reducing the revenues available to fund state operations.

Far from being a fix, these kinds of laws are tax policy gone awry.

The Never Ending Quest For Tax Revenue Leads To No Revenues and No Jobs?

Sales and use tax is imposed by many states, but many people don't pay the use tax on items they've purchased outside the state or much more commonly - on Internet purchases. Some states have established what's referred to as "Amazon tax" laws so that they can attempt to capture tax revenues that otherwise would not have been collected.

The problem with individual states attempting to impose the tax is that they've failed miserably to actually create any revenue because it's discouraged affiliates from participating in Amazon.com programs:

But the state law has done nothing to increase tax revenue. Officials at the R.I. Department of Revenue “do not believe that there has been any sales tax collected as a result of the Amazon legislation,” said Paul L. Dion, who heads the department’s revenue-analysis office.

For a company like Amazon, there is little risk in pulling out of Rhode Island, which has the nation’s fourth-smallest state economy, said Lee Hower, principal at Point Judith Capital, a Providence-based venture capital firm. But affiliate marketing is a “very common” component of many Web startups’ business plans.

“Amazon doesn’t care,” Hower said. “The only thing that Amazon has changed because of this policy is they’ve stopped paying companies in the state. … The reality is we haven’t gotten the revenue or the policy benefits out of this, but we do have this downside.”

Angus Davis, a tech entrepreneur who lives in Providence, said the law should be called an “affiliate tax” since it has no impact on Amazon. “It’s really slamming the door shut at the borders of Rhode Island to any kind of online advertising industry,” he said.

I'm not particularly surprised that there hasn't been any revenues generated from the tax, and that the market has shifted in ways that the states could not imagine - namely that businesses relocated or simply chose not to operate at all.

Yet, for all the problems with the Amazon tax, there are still states contemplating imposing their own form of the tax. The Colorado legislature is contemplating its own version of the tax that wouldn't mention affiliates. Virginia is looking at its own version.

California and New York are looking at the next step since both states are in dire need of additional revenues to feed the insatiable spending in those states. Amazon.com and Overstock are currently litigating whether the New York law violates the U.S. Constitution on Commerce Clause and Due Process grounds and in the process violating Quill v. North Dakota and its progeny.

What will most likely be needed is Congressional action to make such taxation possible. Yet, Congress is not likely to put its own neck on the line to impose still more taxes on an electorate already sick of taxes both existing and proposed. A backlash against taxes that might be imposed on online transactions would be swift and harsh - and for that reason we'll likely see a continuation of various cases and individual states pushing the matter.