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, (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. (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 and 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.

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