Why Does North Carolina Hate Amazon?

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."

Other headlines to rock out to:

Google is a Motley Fool Rule Breakers selection. Amazon.com is a Motley Fool Stock Advisor pick. Try any of our Foolish newsletter services free for 30 days.

Longtime Fool contributor Rick Munarriz has been shopping online for about as long as Amazon.com has been in business. He owns no shares in any of the stocks in this article and is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.


Read/Post Comments (9) | Recommend This Article (6)

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  • Report this Comment On June 19, 2009, at 2:29 PM, RogerJH wrote:

    Thank you for highlighting this topic.

    NC Amazon Associates are mobilizing to let our representatives know that we believe this approach is bad for us, bad for business and bad for North Carolina. Two online petitions are available for people to register their objection to this whimsical and poorly-thought out measure.

    http://www.ipetitions.com/petition/nonconlinetaxes

    http://www.petitionspot.com/petitions/ncaffiliatetax

  • Report this Comment On June 19, 2009, at 3:21 PM, affiliatetip wrote:

    You hit on a point that the lawmakers seem to be missing - this sort of law is putting volumes of small business people out of business.

    They're effectively getting fired by Amazon and many other companies with affiliate programs (that's how it worked out already in NY).

    So, not only more unemployment, but also less taxable income.

  • Report this Comment On June 19, 2009, at 3:37 PM, etownes1 wrote:

    But YOU are missing the "small business" oriented fact that outfits like Amazon wreak far greater havoc on small businesses like bookstores that employ people, pay rent, etc. ... than will ever be offset by "affiliates." (And obviously, Amazon's mult-faceted operation also spears lots of other smallish retailers and service businesses.)

    I don't have my head in the sand - yes, the internet IS a good way to get bestsellers and "professional" books.... But Amazon is an awful lot like WalMart in ONE sense - they tend to suck a great deal of the oxygen out of the "virtual room." That is, these very "efficient" retailers may be good for short-sighted (where can I get an X at the lowest possible cost?) consumers, but they certainly have contributed to unemployment, underemployment and the 2 other major penalties workers get hit with - lower wages (sometimes actually LOWERED wages) and lousy/lousier benefits - like no employer-provided healthcare. (Think about it - how's a small business going to survive when its top line shrinks at the same time its margins do, too?!)

    Again, this is not a rant against Amazon, just a simple - "DO THE MATH before you assume your local legislators got it wrong."

  • Report this Comment On June 19, 2009, at 3:42 PM, affiliatetip wrote:

    @etownes1

    Please do share your math that supports your statements, and please do it without ALL CAPS.

    Personally, I haven't seen any reports on the number of small businesses that have been sent to pasture by Amazon.

    However,I know about a lot of small businesses and taxable income that were born out of affiliate marketing.

  • Report this Comment On June 19, 2009, at 3:46 PM, mgecom wrote:

    One point to keep in mind is that this does not just affect Amazon.com. It affects ANY online retailer who operates an affiliate program. What if you are an avid collector of oak walking sticks and there is no B&M retailer within 100 miles? There's a good chance that you would find a retailer online through an affiliate web site, particularly if you also are able to find discount codes.

    My company is actively leading an organized push against the tax law changes. If you are interested in helping, please don one or both of the following:

    Sign our petition: http://www.petitionspot.com/petitions/ncaffiliatetax

    Attend our in-person meetings next Monday and Tuesday: http://www.mgecom.com/affiliateblog/corporate-news/fighting-...

  • Report this Comment On June 22, 2009, at 11:39 AM, jasonpedley wrote:

    @etownes1 - Those small, local retailers are more than welcome to jump on the Internet, start an online store, start an affiliate program and make money off it. Amazon.com isn't special - they're just willing to think outside the box and let themselves get big. Compete or die...trying to somehow protect these small operations is a waste if they aren't doing a damn thing to be innovative and compete.

    There are some very different fronts being discussed around the Net about this whole situation:

    1. Nexus. From what I've read, once NC determines a date of Nexus for Amazon (and others) the state can demand back sales taxes from all sales made to NC residents to that point. This is read as "easy money" for legislators. But it also means no money moving forward. This boggles my mind and will only hurt the state more than it helps.

    2. Taxation of NC residents. I live in NC and I moved here to get AWAY from taxes. Tax me less and I'll spend more. Tax me less and I'll earn more. Plus, talk about making NC a less-appealing state to live in. Lowering taxes is the path to increased revenue for this state and its residents.

    3. Affiliates. I'm in this group, too. I'm not a super-affiliate, but I use the money I make money from affiliate programs to do two things: Save money for my 5-year-old to go through college and pay taxes. Once affiliates tell the state of NC and its legislature where to put it's taxes, we'll be left out in the cold (or, heat in this case). The state won't get income tax from income on affiliate sales ever again. (Until a court finds this unconstitutional law unconstitutional)

    This is a big deal no matter what angle you look at it from. There are just under 10 other states considering this kind of taxation. Opposing it now in NC will make it harder for other states to follow-suit.

  • Report this Comment On June 23, 2009, at 5:05 PM, tonycnc wrote:

    NC is wrong to consider affiliates a local presence. This will only lead to the loss of income in state taxes on the profits of affiliates or the spending of the commissions in North Carolina. The OPPOSITE approach would be better -- tax NOTHING on the flow of money into NC and be happy with the income and sales tax.

    NC taxes will scare more businesses AWAY.

  • Report this Comment On June 23, 2009, at 5:07 PM, tonycnc wrote:

    Does Google Pay NC taxes on each ad shown to NC residents?

    Google makes millions off of NC residents in advertising -- how much does Google pay in NC taxes?

    This new taxes would only punish small businesses.

  • Report this Comment On June 26, 2009, at 6:27 PM, tonycnc wrote:

    http://2.bp.blogspot.com/_UZFbz9va3fo/SkVFEmVU59I/AAAAAAAAAB...

    Amazon terminated it's programs in NC.

    Good business killing NC Congress and Senate!

    =-P

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