Amazon's Battle Against the Tax Collector

By Rick Aristotle Munarriz | More Articles
March 9, 2010 | Comments (11)

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Once again, Amazon.com (Nasdaq: AMZN) has been forced into playing a political game.

The online retailer sent out notices to its thousands of affiliate marketers in Colorado, informing them that it was discontinuing the commission-generating program for residents of the state.

Amazon Associates is a program where businesses, entrepreneurs, and online hobbyists can earn money by referring leads to the company. Amazon pays as much as 15% of resulting sales back to its affiliates. Whether it's a website operator dedicated to generating third-party e-commerce transactions or a modest blogger with a passion for model trains who links to Amazon rail wares, a healthy cross-section of the country relies on Amazon for either incremental revenue or as an actual business model.

Why is Amazon pulling out of Colorado? Well, just as Amazon Associates bowed out of North Carolina, Rhode Island, and Hawaii last summer, the state's move to tax out-of-state online retailers is at the crux of the decision.

Budget-strapped states have turned to out-of-state e-tailers, enacting laws that would force retailers with affiliates residing in the state to collect state sales tax from transactions by its residents.

Amazon tacks on state sales tax in the few states where it has physical distribution centers, but does not throughout most of the country.

In a realm where every competitor is a click away, Amazon is able to price its wares advantageously as it competes against e-tailers with a physical presence. Meanwhile, Barnes & Noble (NYSE: BKS), Wal-Mart (NYSE: WMT), Best Buy (NYSE: BBY), and Target (NYSE: TGT) have to add state sales tax during the checkout process.

Should online retailers with active affiliate-marketing programs such as Amazon and Overstock.com (Nasdaq: OSTK) be forced to automatically collect state sales tax? It's a touchy topic -- ripe for your next cocktail party or for the comments box below this article -- but I'm only approaching this from the business angle.

Amazon feels that axing its associates helps free it from the in-state presence that triggers the automatic taxation process in many of these state laws. Colorado legislators are arguing otherwise in this particular case, but the end result is that Amazon is flexing its muscles -- pointing out how aggressive state taxation tactics may cost its constituents in terms of the revenue generated by state-based businesses leaning on Amazon for commission payments. It's likely a more popular argument than pointing out that all Coloradoans will be paying more with state sales tax tacked on throughout the site, since that would pit it against hometown retailers.

Amazon is tackling this problem now, hoping to send a message to other states pondering similar legislation. Then again, in a dicey economy where many state budgets are out of whack, this political fight will likely continue to cross into new states.

Is Amazon.com right or wrong here? Share your thoughts in the comments box below.

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Best Buy and Wal-Mart Stores are Motley Fool Inside Value picks. Amazon.com and Best Buy are Stock Advisor recommendations. 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 since the early 1990s, even before Amazon.com was around. He does not own shares in any of the stocks in this article. He 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.

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 March 09, 2010, at 3:56 PM, TyrantBone wrote:

    As a voter, why wouldn't you be banging at your Governors door asking this to be shut off? This is another tax hike at a time when many people don't need it.

    Here's a quote from teh Governor of Colorado Bill Ritter:

    "Amazon has taken a disappointing—and completely unjustified—step. Amazon is simply trying to avoid compliance with Colorado law." (from the Wall Street Journal)

    How can you even make that argument?! You just changed the rules to force Amazon into Colorado law and it's unjustified for them to step back away? This is a horrible move and I just hope it doesn't hit California.

  • Report this Comment On March 09, 2010, at 3:57 PM, TyrantBone wrote:

    As a voter, why wouldn't you be banging at your Governors door asking this to be shut off? This is another tax hike at a time when many people don't need it.

    Here's a quote from teh Governor of Colorado Bill Ritter:

    "Amazon has taken a disappointing—and completely unjustified—step. Amazon is simply trying to avoid compliance with Colorado law." (from the Wall Street Journal)

    How can you even make that argument?! You just changed the rules to force Amazon into Colorado law and it's unjustified for them to step back away? This is a horrible move and I just hope it doesn't hit California.

  • Report this Comment On March 09, 2010, at 4:04 PM, Buffhear wrote:

    Poor Guv. Politicians are used to getting their way and don't like it when people and organizations take totally legal action to get out from under their thumb. I just laugh at the pathetic transparency of what Colorado did and that they lost employment doing so. Ever higher taxation in the 50 states does not a healthy economy make.

  • Report this Comment On March 09, 2010, at 4:05 PM, Buffhear wrote:

    Poor Guv. Politicians are used to getting their way and don't like it when people and organizations take totally legal action to get out from under their thumb. I just laugh at the pathetic transparency of what Colorado did and that they lost employment doing so. Ever higher taxation in the 50 states does not a healthy economy make.

  • Report this Comment On March 09, 2010, at 5:09 PM, bobfederal wrote:

    I applaud the Colorado's stance. I'm not from Colorado, but states and businesses across the country lose to tax free sales outlets, and it costs everyone in the state.

    If a customer can save 8 to 10% by buying it on line tax free they do, and it takes the income outside of their state. I've heard an average sale generates $2.00 towards police services. If the states don't get it in sales tax they will increase property taxes.

    When internet sales are finally taxed in every state, it places Amazon and other internet companies on a level playing field. Today they have an unfair advantage by not having to collect sales tax.

  • Report this Comment On March 09, 2010, at 5:34 PM, thedatadude wrote:

    It would be interesting to run the numbers and find out roughly what this will cost Colorado in the long run. Obviously the new law doesn't effect Amazon exclusively, but it was certainly targeted at them. And obviously somebody over at Amazon ran the numbers and decided whatever the associates were bringing in to help the bottom line wasn't worth the lost sales because of the additional 8% sales tax.

    Another example of short-sighted legislation..."disappointing---and complete unjustifed---step"...who the heck does this guy think he is??!! We're in it for the PROFIT...get it??!!

  • Report this Comment On March 09, 2010, at 5:43 PM, JBG189 wrote:

    I wish they would do something to get out from under NY's sales tax. I have actually not bought things because of it (though that's rare, I usually pay the tax).

  • Report this Comment On March 09, 2010, at 7:02 PM, TyrantBone wrote:

    I respectfully disagree with you, BobFederal.

    How are they placed on a level playing field when having a physical presence exposes you to more customers? Kids can't shop on Amazon with their parents. Amazon, although they sell them, is unlikely to score an HDTV sale online due to the shipping complexities. Besides, the federal law states that charging companies from out of state is illegal. This move taxes consumers and penalizes anyone who decides to shop online. The playing field stance just doesn't make sense to me since online shopping is a completely different experience.

    Also, I won't get into how the states should function, but there is a lot of waste in the budgets. I for one would not want to get taxed another DIME to support growing the law enforcement base. If there is enough law enforcement out there to sit on the street with a radar gun all day, they don't need anymore. This coming from someone who's never had a speeding ticket. I just don't think the states use their budget wisely and there is a lot of waste. The waste will continue until they've already taxed everything under the sun...then they'll probably raise everything that's out there. Amazon is right to show this type of muscle flexing. This money is being taken away from small businesses who refer to Amazon and is coming out of consumers like you and I. Not for it.

  • Report this Comment On March 09, 2010, at 8:08 PM, rugbey wrote:

    What most people don't understand about sales tax law is that simply purchasing something out of state and having it shipped to you does not relieve the buyer of their own states tax burden... it just shifts the burden of collecting the tax away from the seller and places the responsibility of paying it with the buyer. If you buy something, anything, anywhere, unless you drive to New Hampshire where there is no sales tax, you owe your state the salestax rate that your state charges. There is no law that says if you order something on the internet you don't have to pay sales tax. What it does say is that if that retailer has no physical presence in your state, that retailer does not have the responsibility to collect the tax that you owe your state... you owe it yourself... believe it or not.

  • Report this Comment On March 11, 2010, at 11:05 AM, SharpShopper wrote:

    No one in Colorado should be surprised by this given what Amazon did in states that enacted similar legislation.

    The real problem with this issue is not necessarily whether online sales taxes should be implemented but HOW they should be implemented. In most cases, state governments want the revenue but they don't want to spend the time or money on enforcement so they leave it up to the retailers and consumers themselves. That's not exactly responsible governance.

    I love online shopping. I use sites like Google products, Overstock, Sortprice.com and even Amazon on a regular basis. I have no problem with taxes being added to these purchases but if states want that tax money, they should collect it themselves instead of passing the buck to others.

  • Report this Comment On March 11, 2010, at 11:06 AM, SharpShopper wrote:

    No one in Colorado should be surprised by this given what Amazon did in states that enacted similar legislation.

    The real problem with this issue is not necessarily whether online sales taxes should be implemented but HOW they should be implemented. In most cases, state governments want the revenue but they don't want to spend the time or money on enforcement so they leave it up to the retailers and consumers themselves. That's not exactly responsible governance.

    I love online shopping. I use sites like Google products, Overstock, Sortprice.com and even Amazon on a regular basis. I have no problem with taxes being added to these purchases but if states want that tax money, they should collect it themselves instead of passing the buck to others.

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