The 'Amazon Tax' and Affiliate Marketing

Recently, cash-strapped states have been eying juicy internet sales as a potential source of much needed revenue. Some states have passed a so-called "Amazon Tax." The response of big online retailers including Amazon and Overstock.com? Cut their affiliate program in those states.

Many online retailers offer affiliate programs. These allow website owners to make money by advertising products sold on other sites such as Amazon or Overstock. The affiliates typically get paid when a customer they send makes a purchase from the online seller.

In most states that collect income tax, an affiliate already owes taxes on the referral fee they receive.

States that pass an Amazon Tax are mandating that if an online seller has affiliates in the state, then all the retailer's sales in the state should be taxed.

These taxes need to be watched by two main groups of businesses:

• Businesses that earn referral fees or commissions by sending traffic that results in sales by out-of-state online sellers; and
• Online sellers large and small that pay out-of-state websites for traffic leading to sales.

Affiliates will largely have any decision made for them -- as learned the hard way by Amazon and Overstock affiliates in states where the companies have ceased affiliate programs.

Online sellers who engage out-of-state affiliates in states with an Amazon Tax may find themselves obligated to collect sales tax on all sales in those states.

What states are we talking about?

An Amazon Tax went into effect in New York in 2008. Amazon and Overstock sued, arguing that New York was unconstitutionally requiring taxation without any physical presence in the state. Their suits were dismissed last January, and the appeals process is still pending. Amazon has not yanked its affiliates program for New York, but Overstock did.

In Rhode Island, a recently passed Amazon Tax was signed into law. Both Amazon and Overstock have pulled the plug on Rhode Island affiliates.

North Carolina's legislature is still considering a similar tax. Citing the pending legislation, Amazon pulled its program in North Carolina, as did Overstock.

We previously discussed California's attempted Amazon Tax, which was subsequently passed by the legislature.  However, After Overstock yanked its affiliate program for California, and Amazon threatened to do the same, Governor Schwarzenegger vetoed the tax.

The same thing happened in Hawaii, where both Amazon and Overstock pulled their affiliate programs before Hawaii's Governor Linda Lingle vetoed the tax. Overstock has reinstated its Hawaii affiliates program, and should the veto stick, presumably Amazon will too.

With more states facing enormous budget shortfalls, any business that sells online should keep an eye on new attempts to collect internet sales tax.

• Web retailers, states tussle over tax rules (Baltimore Sun)
• Tax on Internet Sales (FindLaw)
• Tax-free Internet shopping days could be numbered (cnet.com April, 2009)
• Amazon Warns Calif. Lawmakers on Sales Tax Bill (Wall Street Journal)
• Texas not pursuing online sales tax (Dallas Morning News)