Thursday, March 11, 2010

Colorado's New Tax Arouses Amazon to Action

Today's BNA Electronic Commerce & Law Report (March 10, 2010) (by subscription) reports on Colorado's enactment of H.B. 1193, which requires retailers with affiliate relationships in Colorado to collect sales taxes for online purchases. The bill reaches out to touch online retailers like Amazon who receive customer referrals from those with online links to Amazon. But in this case, the legislators did not get the extra taxes they anticipated. Instead, Amazon responded by severing ties with Colorado residents who are affiliates.

Sales tax revenues on online sales have long been a bone of contention for states that are hungry for revenues. (I was one of the early writers on this topic, publishing a law review article on it in 1997. See Something New Under the Sun? State Taxation of Internet Commerce, 30 Creighton Law Reveiw 1113 (1997)). Constitutionally speaking, states must have nexus with the seller before imposing obligations on the seller to collect income taxes. Based on the Supreme Court's ruling in Quill v. North Dakota, nexus requires a physical presence for purposes of imposing sales tax collection obligations. Getting nexus over online sellers like Amazon, without any offices or sales departments in the state, has long been a vexing problem. So various theories developed, including looking to the physical presence of agents who may be providing services on their behalf.

Colorado seized on Amazon's associates program, which allows website operators to advertise Amazon products and to receive payments for those customers who purchase the goods. If an "Amazon associate" with this website is a Colorado resident, Colorado legislation seeks to make that relationship a basis for subjecting Amazon to a potential tax collection obligation if the total from all such affiliates exceeds $10,000. It would also impose a requirement to notify Colorado residents of their obligation to pay a sale or use tax, as well as to send notice of all purchases made during the prior year. There are significant penalties (computed on a per customer basis) for a failure to comply.

But as it turns out, some companies don't just shut up and pay. They take action when they view the burdens of the tax to outweigh their benefits. And that is what Amazon did. They wrote all of their in-state affiliates and told them, sorry, no more advertising revenues. Thus, you are essentially out of business if you are making money with a link to Amazon products.

Amazon may lose some customers, but it also disentangles itself from burdensome compliance obligations imposed by Colorado. Colorado loses. It will not generate these future taxes and penalties, and it will also lose the income taxes from the advertising fees paid to affiliates. Colorado citizens lose, particularly those who wanted to earn money from affiliate activities.

A gentle reminder: Taxes have consequences. Not all new taxes raise revenues. Those interested in Amazon's new policy can find it here:


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