Local affiliates here axed by Amazon.com

Retribution for recent tax measure?

By Marianne Goodland
THE COLORADO STATESMAN

Amazon.com this week fired its Colorado-based affiliates in retaliation for the passage of House Bill 1193. The move affects as many as 3,000 businesses and/or business owners in Colorado.

HB 1193 was passed by the General Assembly in February and signed by Gov. Bill Ritter on Feb. 24. As originally introduced, the state would require online retailers, including Amazon.com and Overstock.com, to collect sales and use tax if their companies had a “presence” (the legal term is “nexus”) in Colorado. That presence is in the form of Colorado-based affiliates who advertise Amazon on their Web sites.

In the original version, the fiscal note for HB 1193 estimated the state could collect about $1 million in 2009-10 and about $4.7 million in 2010-11 and thereafter.

But opponents said the state would not collect what it hoped for if online retailers fired their Colorado-based affiliates.

The bill was heavily amended during its trip through the Legislature at the behest of worried Amazon affiliates, who feared the online giant would fire them if the bill passed. Amazon fired their affiliates in North Carolina and Rhode Island after those state legislatures passed similar legislation in 2009. In New York, Amazon is suing the state over its law but in the meantime is collecting the sales tax.

HB 1193 as amended requires retailers to collect the sales and use tax; if they do not the retailer is to notify customers by Jan. 31 of each year that the customers are responsible for paying the sales tax.

On Monday, Amazon did what affiliates and Republican legislators had feared.

In an e-mail sent to affiliates on Monday that notified them of the action, Amazon’s Associates team wrote that Colorado had enacted a “burdensome” law to impose sales tax regulations on online retailers. According to the e-mail, while the regulations do not require retailers to collect sales tax, they “clearly intended to increase the compliance burden to a point where online retailers will be induced to ‘voluntarily’ collect the sales tax, a course we won’t take.”

The e-mail went on to say it would continue to advertise and sell to Colorado residents “through other channels,” including associates in other states.

However, the e-mail also claimed “we are not opposed to collecting sales tax within a constitutionally-permissible system applied even-handedly.” Colorado should either repeal its new law or follow the “constitutional approach to collection” and Amazon might then reinstate its Colorado affiliates. Calls to Amazon’s media department were not returned.

The e-mail encouraged affiliates to contact Ritter and legislators to ask that the bill be repealed.

Marc Braunstein, owner of ShopAtHome.com, an Amazon affiliate that employs 50 people in Colorado, was opposed to HB 1193 as it was originally introduced.

In a press release issued Monday, Braunstein said he was “puzzled” by Amazon’s decision. He pointed out that he and other affiliates had worked with the sponsors of HB 1193 to protect the affiliates, which resulted in affiliate language being removed from the bill when it was in the Senate. “Terminating relations with Colorado affiliates doesn’t do anything to change Amazon’s obligations under HB 1193; it just harms a lot of people who have worked hard to build internet marketing businesses in Colorado,” Braunstein said.

Ritter issued a statement Monday criticizing Amazon’s decision. “Amazon has taken a disappointing — and completely unjustified — step of ending its relationship with associates. While Amazon is blaming a new state law for its action, the fact is that Amazon is simply trying to avoid compliance with Colorado law and is unfairly punishing Colorado businesses in the process,” Ritter said. He noted the bill was trying to establish a level playing field for online retailers and Colorado brick-and-mortar businesses. One of those businesses is The Tattered Cover, whose Neil Strandberg testified before the House Finance Committee in January that his bookstore had laid off 200 employees since the late 1990s when Amazon became a household name. Other local business owners testified that online retailers like Amazon have a competitive advantage when they don’t collect sales tax, and those who order from the company who don’t pay the sales tax get a deal at the expense of their businesses, as well as siphoning off needed revenue for state services.

During the debate over the tax exemption bills that included HB 1193, lawmakers battled each other through dueling press releases. The dueling press releases started back up on Monday, with “I-told-you-so” comments from Republicans.

Senate Assistant Minority Leader Greg Brophy, R-Wray, had worked out part of the compromise regarding the affiliates. He said in Monday’s press release that “the ruling party has decided to go it alone and tax the Internet, [and] young, tech savvy entrepreneurs have lost a great business opportunity in Colorado. We were afraid this would happen.” Brophy said Wednesday he would love to ask for permission to offer a late bill to repeal HB 1193, but said he believes such an effort would be rejected by the Senate Democratic leadership.

Senate Minority Leader Josh Penry, R-Grand Junction, said Monday that “when government raises taxes in a recession, it kills jobs. Shame on the partisan Democrats in Denver for ignoring this rudimentary economic reality.”

Rep. Jack Pommer, D-Boulder, said Amazon had been upfront in their announcement that affiliates had nothing to do with collecting the sales tax. But the retailer’s actions were instead “pure spite” and “dirty tricks” that had no business reason other than that they liked having the unfair advantage over local business. “This is a direct assault on local business,” Pommer told The Statesman Wednesday, and said legislators who opposed the bill were taking the side of Amazon over local business. “If I have to pick sides, I’ll pick Colorado businesses,” he said.

Affiliates are divided on their reaction to the news, with some angry at legislators and others angry at Amazon. On radar.oreilly.com, bloggers were split between blaming the Democrat-controlled Legislature and governor, while others blamed Amazon.

Susanna Donato writes a blog, www.cheaplikemeblog.com, and had an affiliate relationship with Amazon from last summer until Monday. Donato told The Statesman that she probably made about $100 from that affiliation so losing it was not a big hit to her wallet. Donato said she would not get mad at legislators, and this week told her readers to buy from local retailers rather than Amazon, in part to pay the sales tax that Amazon refuses to collect.

The Amazon move has also led to speculation that the action was intended to warn off other states, and perhaps a way to prevent other states from adopting their own versions of Colorado’s law. Carol Hedges of the Colorado Fiscal Policy Institute, in a blog on Huffington Post Monday, said Amazon’s reasoning was two-fold: to put political pressure on the Colorado Legislature to change the law, and to use the state as an example to scare other states from doing the same. As many as 15 other states may be working on legislation to tax Internet sales, many using the same affiliate approach that Colorado originally considered.

The affiliate approach has been the centerpiece of legislation in New York, Rhode Island and North Carolina because of a 1992 Supreme Court decision, Quill v. North Dakota. The court ruled in that case that retailers are exempt from collecting sales taxes in states where they have no nexus.

In the last two years, legislators, including those in Colorado, have looked at bills that said the nexus was the affiliate whose local Web site linked to the online retailer.

Colorado, however, took a new approach — requiring the online retailer to notify its customers in Colorado that they owed the tax and how much. And that new approach is drawing interest from other states. Mark Couch, spokesman for the Department of Revenue, told The Statesman that a dozen states had participated in a conference call last week to discuss Colorado’s new law.

While Colorado becomes the fourth state to pass a bill dealing with the online sales and use tax issue, lawmakers in California are also now looking at a bill with a concept similar to HB 1193’s original version.

In California, lawmakers are currently reviewing ABX8-8, a bill that would require online retailers with a nexus in California to collect and remit sales taxes. Colorado’s law requires only that state sales and use tax be remitted; California’s would include county and other local sales tax. The state base sales tax rate in California is temporarily 8.25 percent but will go down in 2011 to 7.25 percent.

The California bill has already passed the Senate and is now awaiting action from the Assembly, California’s version of the House. The bill is being carried in the Assembly by Charles Calderon, the chair of the Assembly Revenue and Taxation Committee, which will likely get the bill assigned to it.

Tom White, chief of staff for Assemblyman Calderon, told The Statesman this week that they were aware of what had happened in Colorado. He said online retailers such as Overstock.com had made the same threats to fire their affiliates, and anecdotally had heard the same about Amazon. “These efforts to collect taxes due are not new taxes,” he said Wednesday. “Consumers are responsible for paying sales or use taxes.” Numerous press estimates place the number of affiliates in California at 25,000.

Marianne@coloradostatesman.com