Amazon’s baffling response to Colorado’s web sales tax suggests a legal strategy

Enormous online retailer Amazon.com reacted to news that it would now be required to voluntarily report Colorado state sales taxes by canceling its relationship with affiliate web sites here– that is, with sites that earn a small fee for each websurfer they send to Amazon through links and ads. In a letter sent over the weekend to its Colorado affiliates, Amazon announced it will continue to do business with residents in Colorado and didn’t elaborate on how canceling the affiliate relationships balances against the new tax.

The mystery has led analysts and lawmakers to speculate that the move was done strictly to send a political message. Others suggest the move is part of a larger corporate legal strategy to combat laws already on the books in Colorado, Rhode Island and North Carolina, as well as any future state sales tax laws that might pass around the country.

Reviewing the Amazon move just hours ago, the Wall Street Journal had yet to make clear sense of Amazon’s motives.

It wasn’t immediately clear why Amazon chose to retaliate by dropping affiliates because affiliates aren’t named as a part of the Colorado law. Affiliates have been part of similar sales-tax collection laws imposed by other states.

Amazon CEO Jeff Bezos

Amazon CEO Jeff Bezos

The president of one local affiliate, Marc Braunstein of ShopAtHome.com, said in a release that he and others running affiliate businesses were likewise puzzled by Amazon’s decision, partly because Colorado affiliates had worked with lawmakers and Gov. Bill Ritter specifically to amend the law to leave affiliates out of it, which they did.

“I understand Amazon’s frustration with the law,” said Braunstein. “But I don’t understand why they have chosen to terminate Colorado affiliates, as Colorado affiliates are not part of the legislation.”

Amazon has been doing retail business tax-free since its inception in 1995. It is one of the largest online retailers in the world. Its sales rocketed the last quarter of 2009, fueled in part by the growing popularity of the Kimble portable reader. The company estimated its profits for the quarter at between $300 million and $425 million.

In its weekend letter, Amazon called the new Colorado tax law, HB 10-1193, “burdensome” and encouraged affiliate members to call state lawmakers to complain. The author of the Amazon letter appeared both annoyed and affronted by the Colorado law. The author wrote that Amazon, along with many others, had opposed the legislation but that it “had been enacted anyway.”

We are writing from the Amazon Associates Program to inform you that the Colorado government recently enacted a law to impose sales tax regulations on online retailers. The regulations are burdensome and no other state has similar rules. The new regulations do not require online retailers to collect sales tax. Instead, they are clearly intended to increase the compliance burden to a point where online retailers will be induced to “voluntarily” collect Colorado sales tax — a course we won’t take.

We and many others strongly opposed this legislation, known as HB 10-1193, but it was enacted anyway. Regrettably, as a result of the new law, we have decided to stop advertising through Associates based in Colorado. We plan to continue to sell to Colorado residents, however, and will advertise through other channels, including through Associates based in other states.

Liberal advocacy group ProgressNow Colorado, which supported the tax legislation, saw the Amazon move as a bald political pressure campaign.

After profiting from millions of dollars in direct sales to Colorado residents for years, Amazon is determined to protect their unfair advantage over local brick-and-mortar retailers,” said ProgressNow Colorado Executive Director Bobby Clark…

“Rather than comply with the law as Amazon already does in many other localities where they collect sales tax on purchases, they chose to ‘make an example’ of our state, and unfairly punish their own business associates for political gain. Amazon clearly expects Coloradans to react hastily and in anger, but our state’s citizens understand who is manipulating the situation for their own financial and political benefit.

State Sen. Rollie Heath, D-Boulder, one of the original sponsors of the bill agreed with ProgresssNow that the move smacked of politics and corporate gamesmanship.

The [Colorado] legislature went to great pains to protect local affiliates– and removed all mention of affiliates at their request, and with their support– and Amazon knows full well as a result that House Bill 10-1193 as amended has nothing to do with affiliates. Now, Amazon is firing innocent people to make a point. In an effort to lock in a massive corporate tax subsidy that tilts the playing field in its favor, this multi-billion dollar corporation has decided to throw its weight around by firing its small, Colorado-based affiliates.

“This is reprehensible corporate bullying by a big business that doesn’t want to play by the same rules as everyone else. At a time when the American people are disgusted with corporate greed and excess, Amazon couldn’t be more selfish…

“Compliance with the bill is not difficult and there are many examples of good businesses like Barnes and Noble and Lands End who collect and remit Colorado sales tax. Amazon’s slashing of its ties with Colorado affiliates should be seen for what it is: an attempt to bully Colorado into continuing to protect out-of-state businesses at the expense of local companies and vital state services like education, healthcare, and roads. But Colorado will not reward Amazon’s decision to hold its affiliates hostage.”

In its reporting, however, the Wall Street Journal hinted at potential legal reasons for the move. The similar North Carolina and Rhode Island laws passed last year held that Amazon’s in-state affiliated sites amounted to “a physical nexus” or presence in the states and so required the company to pay state taxes. Amazon disagreed, arguing that links at affiliate sites amount merely to promotion or advertising not a physical presence or some kind of local franchise representation. Amazon lost the battle and so pulled its affiliate business in those states.

Even though, as Heath pointed out, Colorado’s law makes no mention of the “affiliate-nexus” argument, Amazon may be simply shoring up defenses against coming sales tax laws and firming up ground here in Colorado from which to mount a legal challenge to the new law.

Amazon spokespeople were cryptic in their responses to reporters all day, including to the Journal, which merely received a message that repeated known facts and that was careful to characterize affiliate business as advertising.

“We advertise through a variety of means, but regrettably, as a result of the new law, we have decided to stop advertising through associates based in Colorado.”

Colorado Senate Majority Leader John Morse from Colorado Springs has taken issue with the Amazon decision and sent out a video blog on the matter this afternoon, explaining that companies like Apple, for example, have been paying this tax without complaint and that, although he is personally a big fan of the Amazon Kindle, he would now be switching over to the Apple iPad as a consumer protest against Amazon’s “unconscionable” “pure retaliation.”

“I can tell you, Amazon lost a great customer today,” Morse says.

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About the Author

John Tomasic

Writer, editor, web wrangler. He has worked for art, business, culture, politics publications and for a UN war crimes commission.
jtomasic@coloradoindependent.com | 720-432-2128 | @johntomasic

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