Amazon 1, North Carolina 0

Rest easy, South Carolina. Your northerly neighbors are the butt of the joke this time.

Sure, South Carolina has its disappearing and philandering governor, and who can forget 2007's Miss Teen South Carolina? But now, North Carolina appears to be the laughingstock -- at least when it comes to e-commerce.

In a pre-emptive move, Amazon.com (Nasdaq: AMZN  ) is booting all of its affiliates who legally reside in North Carolina. The state is likely to pass a law this week that would force online retailers with a physical presence in North Carolina to begin collecting sales tax on purchases originating there.

In short, if the bill passes and Amazon hadn't canned members of its Amazon Associates program, Amazon would have to begin adding 4.5% to nearly every sale in the Tar Heel State. Shoppers are supposed to pay "use taxes" for Internet purchases on their own, but few apparently do.

Start spreading the news
North Carolina figured that it had Amazon cornered. When the state of New York passed a similar bill last year, Amazon blinked. It decided to keep its affiliates in place, and now it tacks on sales tax to New York orders.

Overstock.com (Nasdaq: OSTK  ) , on the other hand, decided that the burden of collecting state sales tax and charging higher prices to New Yorkers for its wares wasn't worth it. The terms for Overstock's affiliate marketing program in the Empire State are spelled out in the e-tailer's terms and conditions:

Publisher understands that Company will not enter into this Agreement with any Publisher who is domiciled in or a resident of the State of New York. As such, Publisher represents, warrants and certifies that it is not domiciled in or a resident of the State of New York. Publisher acknowledges that should it be domiciled in or a resident of the State of New York, significant damages could arise against Company.

Amazon saw the writing on the wall this time. Online retail is a cutthroat business, and it would be hard to compete if Amazon has to charge more in certain states in exchange for the luxury of affiliate marketing.

The company let New York win last year's battle, but it needed to set an example in North Carolina before other states, crushed by budgetary shortfalls, turned to taxing e-commerce as a way to supplement their thinning revenue streams.

Sorry, North Carolina. You just got pwned by Amazon.

Associates by any other name
An affiliate-marketing primer is in order. Commissioned lead generators aren't typically sophisticated high rollers. We're talking about salt-of-the-earth folks, like a stay-at-home mom who blogs about her favorite recipes and uses links to Amazon's recipe books and kitchen supplies to supplement her family's income. Or it could be an underclassman at UNC, running a small site devoted to comic books and using Amazon links to cover his hosting costs.

Amazon Associates is a free affiliate program that's easy to implement across any blog, site, or even social network. If an "associate" sends a customer to Amazon's virtual storefront, the affiliate can earn as much as 15% of any eventual sale.

The irony is rich for North Carolina. A move that started as a way to boost its tax collections is now going to hurt it. State residents who relied on Amazon Associates for income -- taxable income at that -- will have less to report. Some Web entrepreneurs who leaned heavily on the program may even have to file for unemployment assistance.

Yes, there are plenty of other programs available. ValueClick's (Nasdaq: VCLK  ) Commission Junction runs the third-party platforms for the likes of Best Buy (NYSE: BBY  ) and Sears Holdings' (Nasdaq: SHLD  ) Sears stores. However, Amazon is the seasoned industry veteran, with a wide breadth of merchandise that makes it a nice fit with any niche site.

Taxing concerns
Real-world chains such as Best Buy and Sears don't have to worry about this. Since they already have a physical presence through most of the country, they're already collecting state sales tax on their respective Web sales.

One of the arguments often raised in suggesting that Amazon will never buy Netflix (Nasdaq: NFLX  ) -- despite the obvious fit -- is that Netflix has a physical presence in most states through its network of regional distribution centers.

An unbiased observer may feel that it's only fair for Amazon to shoulder the sales-tax burden. Why should similarly priced items on BestBuy.com and Amazon.com cost more through Best Buy because of the state tax?

On the other hand, Maryland, Minnesota, and Tennessee have all proposed laws similar to what North Carolina is proposing -- and the proposals were ultimately rejected in those states.

Locals probably don't appreciate paying more for the same product than folks in neighboring states do. Now that Overstock and Amazon are playing hardball to keep their pricing advantages, the laws won't make a lot of sense from a revenue-generating perspective, either.

Amazon may have needed its Associates program a dozen years ago, when it was trying to reach deep into the realm of webmasters and free-hosted page creators to establish itself. Back then, it was simply trying to get noticed as a media retailer. Its biggest competitor was Barnes & Noble (NYSE: BKS  ) .

Nowadays, Amazon is ubiquitous, and customers show up on their own. Amazon needs a pricing advantage in North Carolina more than it needs a network of incentivized lead generators. It's a pity that North Carolina is unlikely to let the company have both, but the last laugh is coming at the expense of North Carolina's coffers.

Other headlines, if you still want to live in the past:

Amazon.com, Best Buy, and Netflix are Motley Fool Stock Advisor selections. Best Buy and Sears Holdings are Motley Fool Inside Value picks. The Fool owns shares of Best Buy. 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 shares of Netflix 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 (7) | Recommend This Article (11)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 29, 2009, at 12:57 PM, wolfhounds wrote:

    There's more hear than meets the eye. Yes, AMZN didn't want to redo the NY mistake, but that case is on appeal. There's more to sales tax law than simply classifying affiliates as having a physical presence. The Supreme Ct. has established the rule that merely having a salesperson present in a state, or even carrying inventory to restock stores does not constitute nexus. The question to be answered by the associates program is whether their activities reach a level beyond permitted by the court.

    AMZN has drawn the line because even if they win this case, they would have the daunting task of refunding sales tax collected.

  • Report this Comment On June 29, 2009, at 1:22 PM, SteveTheInvestor wrote:

    Sounds like a good move by Amazon. Indeed.... making taxes more of a burden can drive businesses out of the state at times.

  • Report this Comment On June 29, 2009, at 1:43 PM, Melaschasm wrote:

    NC raised taxes on Amazon, so Amazon shut down its operations (affiliates) in NC. Now NC is out a bunch of jobs and income tax revenue.

    The USA is going to put a big tax on companies which use large amounts of carbon. If the logic holds, these high carbon companies will shut down their US operations, and just export the products into the USA, tax free.

    If you think Cap & Trade makes any sense, then what am I missing?

  • Report this Comment On June 29, 2009, at 4:53 PM, TMFBreakerRick wrote:

    And now Rhode Island associates have also been nixed, by the way:

    http://www.pbn.com/detail/43272.html

    The plot thickens.

  • Report this Comment On June 29, 2009, at 5:52 PM, affiliatetip wrote:

    BTW, "free affiliate program" is redundant. There are no fees to join affiliate programs.

    "Amazon may have needed its Associates program a dozen years ago, when it was trying to reach deep into the realm of webmasters and free-hosted page creators to establish itself... Nowadays, Amazon is ubiquitous, and customers show up on their own."

    Do you have data on the lack of need by Amazon to retain affiliates, or is this simply a baseless opinion?

  • Report this Comment On June 29, 2009, at 10:23 PM, TMFBrewCrew wrote:

    Great move! I'm glad that Amazon stood up to our socialist governor and hopefully taught her a lesson. Way to cost us a few more jobs Bev!

    Brian in NC

  • Report this Comment On June 30, 2009, at 6:06 PM, idaconcpts wrote:

    We had the same move happen here in Hawaii yesterday, for more details check http://idaconcpts.com/2009/06/30/amazon-associates-gives-haw...

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