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North Carolina is the latest state to go after the low-hanging of e-tail taxation. Facing a budgetary gap in the billions, North Carolina is hoping to pass a bill that would force out-of-state Internet retailers such as Amazon.com (Nasdaq: AMZN ) to charge and collect sales tax on orders originating in the state.
Web shoppers are supposed to self-report sales tax at the state level, but few people even know about the rule, and it's a poorly policed practice. Virtual-storefront operators such as Washington's drugstore.com (Nasdaq: DSCM ) and Utah's Overstock.com (Nasdaq: OSTK ) are required to collect taxes only when the online retailer has a physical presence in the state.
Amazon therefore automatically tacks on sales tax to orders that come from its home state of Washington, as well as from states where it has fulfillment centers, including Kansas and Kentucky. The company began adding sales tax to orders in New York in June of 2008, when the state passed a law similar to what North Carolina is trying to pass this summer.
North Carolina is arguing that the Amazon Associates program -- through which the leading online retailer pays commissions to website and blog operators for sales arising from their direct referrals -- gives the company a physical presence in the states where those operators live.
Amazon is fighting back. It's threatening to eliminate relationships with all of its affiliates residing in North Carolina before it has to begin adding 4.5% in sales tax to orders placed in that state. The tax is not just a hassle for Amazon; it would put the company at a pricing disadvantage to rival online merchants who don't run affiliate programs.
We don't know how many North Carolina residents belong to the program, but getting people to participate is an easy sell. If you're a hobbyist running a blog on collectible trains, why not link to related Amazon products and earn as much as 15% of the action?
If Amazon delivers on its threat, no one will win. Amazon will miss out on the leads. Its affiliates in North Carolina will lose their commissions. And the state will miss out not only on the 4.5% sales tax it would be collecting from Amazon, but also on the revenue-generating nibble from Amazon's commissions that generate taxable income for its affiliates. The Amazon Associates program also provides an attractive revenue stream for stay-at-home moms and other home-office-based Web entrepreneurs, so forcing Amazon out could also make the unemployment lines longer in North Carolina.
In short, we're in a blinking contest. North Carolina needs the money, and Amazon needs to set an example, before other states follow suit.
This showdown can also have more catastrophic implications, particularly for sites that run affiliate marketing programs, including ValueClick's (Nasdaq: VCLK ) Commission Junction, Google's (Nasdaq: GOOG ) DoubleClick, and possibly even paid-search partner programs run by Yahoo! (Nasdaq: YHOO ) and Google.
Maybe it's time to take those "First in Flight" North Carolina license plates and change the slogan to "First in Fight."
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