Observant readers may have noticed the sudden disappearance of all the Amazon ads and search boxes from our sites. After over a decade and a well over a quarter-million in revenue generated for them we were given one hour notice that our relationship (like that of all California affiliates) was unilaterally terminated. There is plenty being written about the situation today but we wanted to share our perspective…

First and foremost it is important to say that contrary to nearly every headline the move by California and several other states is not a new Tax in any way. All products sold to residents of a state are subject to that state’s tax. It’s just that if the product is sold in the state at retail (or by a company with a store in the state) then the seller is charged with collecting the tax and remitting it to the state. For other sales (like mail-order or online sales from out of state companies) the buyer is responsible for paying the tax on their state income tax return as a “Use” tax.

For starters I suspect most taxpayers don’t even realize they should be paying the tax or how to pay it. And of course compliance in this case is very low. So the effect is that the states are losing a great deal of tax revenue and have cleverly decided they could try and force out of state companies to do the collecting for them. But the Supreme Court has said they can’t do that unilaterally so they have come up with schemes to expand the definition of companies doing business in their state to include affiliates and (in the case of California) subsidiaries.

So companies including Amazon (and overstock.com and others) are responding by shedding affiliates in states (like Colorado, California, Rhode Island, Connecticut, etc.) that have pushed them to collect sales tax on their residents. – Of course online sites for retailers with a national presence like Best Buy already collect sales tax nationwide so it isn’t exactly unprecedented.

As Amazon points out in their letter to affiliates (the same one announcing they have been summarily dumped, probably before the letter was even opened) they complain that the laws are the work of those “big box retailers.” Well, sure, it is a big business issue for them if they are effectively charging 8.25% more than their competition for the same product. It’s hard to blame them for trying to level the playing field.

The situation really begs for resolution at a national level. Our states are almost all in deep budget holes and brick and mortar retailers are crumbling at an alarming rate. That further erodes not only sales taxes but property taxes and in turn payroll and income taxes as local workers are laid off.

Short of a campaign to get everyone to pay Use tax (we can start on that right after the one to end obesity) some serious debate needs to occur and a framework put together. Unfortunately it seems like the only way that can happen is by adding it to the long list of issues about which Congress is avoiding serious discussion. The issue is complicated by the number of small businesses (like ours) which also sell products and services on the Internet and would have a very difficult time managing the collection of taxes for 50 different states and even different counties within each state.

Frankly in the case of Amazon affiliates are the least of their worries. The Kindle and their music site are run out of California and the new law is intended to force the issue on that front. They can sacrifice all their affiliates but anything that affects the Kindle won’t be good for them, even if temporary.

If the only impact is on affiliate business then there is no question the new law will backfire. Most small affiliates will just stop, reducing their income and the resulting taxes and larger affiliates will relocate to other states. Tax revenue for the states affected will decrease as it has in Rhode Island (one of the first states to pass a similar law).

The only potential upside for these states would be the transfer of affiliate sales from “non-collectors” like Amazon to “collectors” such as Best Buy. Best Buy is already actively campaigning to recruit dumped Amazon affiliates. For electronics this makes a lot of sense but Amazon is so deeply entrenched for book sales and in some other verticals that it is hard to see consumers changing their buying habits.

The other side of the coin is that it is really unclear what it means for an affiliate to be a “resident” of a particular state. Webservers are located all over the country as are telecommuting employees. Similarly payments are typically made electronically to bank accounts that live in the ether.

So the practical effect is a lot of headaches for affiliates (like us) to either transition to another location or change our business model, a loss of tax revenue and jobs for our state, some ding in the business of “non-collectors” and hopefully a new enthusiasm for dealing with the issue at a national level.

For us the most irksome part was the lack of notice on the part of Amazon. The first word they provided to their associates was an email yesterday (June 29) saying they might have to terminate California associates on September 30th. Okay, fair enough. But just a couple hours later they sent out an email saying they had essentially immediately terminated all relationship with California associates. Logging in to an affected associate account didn’t yield any helpful information other than “This account is closed and will not generate referrals. Access to this site is for historical purposes only. “ in bright red letters. Not a friendly way to end a 12+ year relationship.

To avoid making this post any longer I’ve glossed over many of the technical details that make the entire situation so complex legally. Below are some links to a few of the many articles covering one aspect of the issue or another.

What would you do? Switch to “collecting” vendors like Best Buy and a bookstore (which one would you use?)? Re-locate the affiliate business to another state? Find a new line of work? Let us hear your thoughts on the issue and what you think the solution is both to our specific issues as an affiliate and to the larger issue of states and internet taxes.—David