Colorado and Amazon Battle and People Like Me Suffer

The Problem
Last month Colorado state legislature passed a bill that requires out-of-state stores to report unpaid sales tax to the state, and to the buyer. Basically, if you buy something from an online retailer, like, you don’t pay sales tax. Instead, you are supposed to pay sales tax on your own to the state. This is called “Use Tax” and has been in place since before the Internet. But most people don’t know about Use Tax and don’t pay it. So when people in Colorado buy something from Amazon, they get away with not paying sales tax.

Why Is It a Problem?
The government of Colorado wants this to stop for several reasons. One is that the state needs money, and the unpaid millions of dollars could help. The other is that they see this as unfair competition to in-state stores. They think people are buying from Amazon instead of from the store in their neighborhood so they can avoid sales tax.

Whose Responsibility Is It?
So the state makes it the buyer’s responsibility to pay the state. This makes sense, since the buyer is in Colorado. The seller isn’t. In fact, if the seller is in Colorado, say with a local “nexus of operations” like a retail store, they already charge sales tax, even when you buy online. So retailers like Target and Apple already charge sales tax. No problem there.
But the new bill also makes it Amazon’s responsibility. Which is strange, since Amazon doesn’t have any operations in Colorado. No stores, no employees, nothing. So Colorado is exerting its power outside of the borders of Colorado.
The Supreme Court already weighed in on this, saying that it is illegal for states to impose sales tax on companies that do not have a nexus in the state.

What Are Affiliates?
So enter “affiliates.” Amazon calls them “Associates.” Basically, anyone who has a Web site, such as a blog, can be an affiliate. All that means is that you can place links for pages on Amazon on your Web site. Instead of getting paid when someone views an ad, or clicks on it, you get paid if someone goes to Amazon from your link and buys something.
So say I have a site about socks. I blog about socks. I review them, I tell people where to find deals, and so on. I can put a link on my site that links to a page on Amazon that has socks for sale. If someone clicks on my ad, they go to the Amazon page with the socks on it. If they buy those socks, I may get a small cut, say 5% of the sale.
If a lot of people come to my site because I am a good sock blogger, then I could potentially earn part or all of my living from writing my sock blog.

Making the Problem Worse
In other states, similar bills have passed that use affiliates as a “nexus of operations.” If some blogger has an affiliate link on their site, it counts just as if Amazon had a real store on that state’s soil.
Amazon believes that the Supreme Court’s decision doesn’t apply to such a lame excuse for a nexus. But in order to protect itself it simple does this: It forbids affiliates in that state.
So North Carolina passed a bill that said affiliates count as a nexus, and therefore Amazon must collect sales tax and send it on to the state. Amazon reacted by simply forbidding affiliates in North Carolina, closing all existing affiliate accounts. No affiliates, no nexus, no sales tax.
The same thing happened in Colorado this week. Amazon closed all affiliate accounts in Colorado.

Wasn’t the Colorado Bill Different?
Yes, it was. Legislators worked with bloggers in the state to remove the idea of affiliates as a nexus from the bill. But in the end Amazon still closed all affiliates in the state. They warned legislators that they would do this if the bill passed.

How Will This Hurt Colorado Small Businesses?
One article I read estimates that more than 3,000 people earned some of their income from the Amazon affiliate program. I’m sure a lot of them earn only a small portion of their income from it. I, myself, stood to make about $2 or $3 thousand from Amazon affiliate links in 2010.
If I am average, then the total revenue lost will be around $7.5 million. That’s income that the state would have collected income tax on. That’s money that Colorado residents would have spent while living in the state.
So right off the bat we’ve got a substantial individual and state revenue decrease. This is the opposite of what the legislators intended, I’m sure. But it is exactly what any Internet-related businessperson could have told them would happen.

Who Is To Blame?
Both the state government and Amazon are to blame here. The state should have known this would happen. Amazon told them it would. Amazon did this in other states. The Colorado government passed a bill they should have known would have an immediate impact on small business and individuals.
The reason the state passed this bill was to get Amazon to inform Colorado customers about the tax they owed, and send that information to the state. But legislators should have known that Amazon was not going to do that. And they surely aren’t going to do it now. So, any state revenue benefit is not going to happen. But the impact to the bloggers of Colorado has already occurred.
Amazon can also be blamed for overreacting here. The Colorado bill doesn’t not say that affiliates are nexus, so Amazon could have gone about business as usual and just refused Colorado’s request for action and information.
?Shouldn’t Government Stand Up to Big Business?
On the one hand, it is great that Colorado wants to stand up to the out-of-state Amazon company. But on the other hand, retaliation from Amazon is directly hurting Colorado citizens.
If this was the case of two big companies in a fight, then may the best one win. But it isn’t. Colorado state government serves the people. They shouldn’t put their hate for Amazon ahead of the well-being of their citizens.
Both Amazon and Colorado are using affiliates as pawns in this game. But Colorado is supposed to be working for the people. It should take the high road here in favor of people, not politics.

How Can This Be Fixed
Simple. Colorado should repeal this law. Amazon has already said they will re-instate the affiliates if this happens.
Other states are willing to put their politics ahead of their people and will take this to the Supreme Count. Once that happens, then all states and Amazon can act together to comply with the decision.
This is a battle that Colorado citizens did not ask for and can only result in casualties, not victories.

Bottom Line

  • Amazon is not a Colorado company. Colorado can’t tell it what to do.
  • The Supreme Court decided that out-of-state companies weren’t responsible for state sales tax.
  • Legislators were warned by Amazon this would happen if they passed this bill.
  • Amazon didn’t have to fire the affiliates, they overreacted.
  • The state won’t get any revenue benefits from this bill since Amazon won’t comply.
  • Colorado will lose income tax because of the loss of revenue brought about by this bill.
  • People living in Colorado will be hurt by this bill.
  • Colorado has a responsibility to its people, not to some political tax fight.
  • Colorado should repeal this law and wait for another Supreme Court decision.
  • Posted on March 10, 2010 at 9:39 am by Gary Rosenzweig · Permalink
    In: General

    One Response

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    1. Written by Brian Huffman
      on 3/10/2010 at 10:54 am

      Well written Gary. At some point, we need to consider that the decentralized nature of the web and its underlying infrastructure reduces physical location to semantics when we apply state laws to the actions performed on the web.

      In other words, the medium is agnostic, when I purchase online I don’t know the state, country or nation of the site, nor should I.

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