SALE AND TAXATION OF GOODS OVER THE INTERNET

Amazon Cuts North Carolina Affiliates to Avoid Tax

Amazon.com Inc. said it has ended business relationships with marketing affiliates in North Carolina to avoid collecting sales tax in the state.

North Carolina within the next week could pass a law that would force companies
to collect the tax if they have in-state online-marketing affiliates -- people who get a sales commission from links on their Web sites. To avoid getting caught by the law, Amazon is dropping the affiliates.

Affiliates account for a relatively small slice of Amazon's traffic, so the move isn't likely to cause major damage to the company's business. The Seattle e-commerce giant will continue to sell goods directly to consumers in the state through its own Web site and will still allow purchases from independent online merchants that sell through Amazon's site.

But the decision highlights mounting tensions between online retailers and cash-strapped states across the country. Other states are considering similar laws that would use affiliates as a way to force companies to collect a sales tax for online purchases. Amazon also has threatened to pull out of its affiliate business in California, Hawaii, Rhode Island and other states. States including Maryland, Minnesota and Tennessee have rejected similar laws.

Consumers are technically supposed to pay a so-called use tax for online purchases on their own, but most don't. Many e-commerce sites rely on the price advantage they have over traditional retailers because they don't have to collect taxes, and forcing them to collect the tax upfront could take away some of that advantage.

New York passed an Internet-sales-tax law last year, which Amazon and Overstock.com Inc. challenged in court but lost. While they are appealing that ruling, Overstock has dropped its affiliates in the state and Amazon has begun collecting a sales tax in New York.In an e-mail Amazon sent early Friday morning to North Carolina affiliates, the company informed them that their accounts would be closed as of June 26. "This is a direct result of the unconstitutional tax collection scheme expected to be passed any day now by the North Carolina state legislature (the General Assembly) and signed by the governor," reads the message."

In the event that North Carolina repeals this tax collection scheme, we would certainly be happy to re-open our Associates program to North Carolina residents," the email added.

Amazon spokeswoman Patty Smith said the company made the move because "the way it is drafted in North Carolina is that the law goes into effect when it becomes enacted -- and that could be as early as tomorrow.

"Trade groups representing affiliates say that using them as a means to collect taxes is unfair and ineffective, because they also contribute income-tax revenue to states."

The sad irony of this issue is that the 'Amazon Tax,' as the North Carolina General Assembly calls it, will not collect any taxes -- it will only cause lost revenue for North Carolina businesses," said Bob Butler, the chief executive of BestThinking.com, a former Amazon affiliate based in Cary, N.C.