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Amazon Strikes First

Reacts To Rule By Cutting Ties With State Affiliates

Dan Haar

June 11, 2011

Amazon.com sent notices Friday to the owners of Connecticut websites saying the online retailer was ending cooperative sales agreements, effective immediately, because the newly enacted state budget would require the online retailer to collect sales taxes.

Amazon's move follows a similar action by Overstock.com. Both online retailers, along with others, have called the tax rule unconstitutional and said they will fight it in court.

The change means hundreds, perhaps thousands, of Connecticut residents who own websites will no longer be eligible to receive sales commissions under the "Amazon Associates Program" if customers make purchases after clicking through to Amazon from ads on the host websites.

Amazon was clear that Connecticut residents will still be able to buy goods through its website. But by severing ties with its Connecticut partners, Amazon intensified a standoff over how and whether states can collect sales taxes for online purchases.

At issue is a change in the state tax rules that takes effect July 1. Online retailers with operations or a "nexus" in the state must collect the sales tax, which increases next month from 6 percent to 6.35 percent. And under the rules, agreements with locally owned websites are considered to be operations.

"We opposed this new tax law because it is unconstitutional and counterproductive. It was supported by big-box retailers, most of which are based outside Connecticut, that seek to harm the affiliate advertising programs of their competitors," Amazon.com wrote to its associates. "Similar legislation in other states has led to job and income losses, and little, if any, new tax revenue. We deeply regret that we must take this action."

The budget, crafted by the administration of Gov. Dannel P. Malloy, calls for the tax to raise $9.4 million from $148 million in online sales each year. State Revenue Services Commissioner Kevin Sullivan, however, agrees with Republican opponents that the tax won't yield that kind of money in the coming year, if it yields much at all.

Still, Sullivan, a former state Senate president pro tem and lieutenant governor, said the tax is worth pursuing because it's fair. After all, he noted, residents must report and pay a use tax - in essence, the sales tax - on all online purchases that would be subject to the sales tax if made in person. The new rule, he said, simply requires Amazon and other online retailers to collect the state's money up front.

"At the end of the day, it's hard to argue that one, these folks aren't disadvantaging competitors," Sullivan said," and two, what is the big deal? Collect the tax. It's not a big deal. I'm at a loss to understand why Amazon and why Overstock have dug in their heels."

Sen. Andrew Roraback, R-Goshen, said Friday that the new rule was a misguided attempt to raise money and help local merchants.

"This is sadly and predictably turning into the lose-lose situation that sober minds knew would happen," said Roraback, ranking GOP member of the General Assembly's tax-writing committee. "There's no one in the legislature who doesn't want to help our Main Street businesses. ... the problem is that states are powerless to fix the problem. They want a workable tax, and we passed an unworkable tax."

Roraback said website owners who count on the payments won't get them now, and the state won't get its money either. "Amazon is heading for the hills and there's no way for us to catch them."

Not so, Sullivan said. Even without the new rule, he said states might have the ability to force online retailers to collect sales and use taxes.

About 20 states have adopted the new rule, and both sides agree it will end up being settled either in Congress or the U.S. Supreme Court as a national issue.

Meanwhile, some major traditional retailers are stepping into the fray. Sears earlier this year offered snubbed website owners in Illinois, its home state, to join its website as associates and receive commissions.