Controversial "Amazon Tax" State Laws Trap Affiliates in the Middle of E-Retail Fairness Battle

California recently joined Arkansas, Colorado, Connecticut, Illinois, New York, North Carolina and Rhode Island to enacting what has been called the “Amazon tax,” which would require the Seattle-based online retail giant to charge customers in those states for sales tax on their Amazon purchases. In response, Amazon has cut ties to its affiliates in those states. These small businesses, not-for-profit organizations or entrepreneurs that earned in many cases significant income by referring buyers to Amazon, are faced with loss of that revenue.

A 1992 Supreme Court decision found that mail-order merchants did not need to collect sales taxes for sales in states in which they did not have a physical presence. This gave online retailers an advantage over brick and mortar stores, who had to collect sales tax. States that have enacted the new law maintain that Amazon’s use of affiliates—people who promote Amazon products on their website and provide readers links for them to click through and purchase a product—gives them a physical presence in the state, and they should therefore have to collect sales taxes. Many are counting on these revenues to help fill billion dollar shortfalls.

Of the investors we researched, those who identified themselves as business owners were understandably the most concerned about sales tax. Those businesses with a brick and mortar presence in a state have pushed for a level playing field in regard to online retailers who do not charge the sales tax.

Consumers are not affected by the law. Caught in-between, observed Paul Edmondson, CEO of HubPages, an online publishing platform, are the sites’ thousands of writers who make supplemental money from Amazon’s affiliate program. “The affiliates are pawns,” he told MillionaireCorner.com.

As they done in other states, Amazon sent emails to its 10,000 California affiliates informing them they had been terminated, thus ending their commissions. Other e-commerce companies, such as Overstock.com, did the same, affecting a reported 25,000 businesses, individuals and not-for-profits who make commissions as online retailer affiliates. Among those impacted, the Sacramento Bee reported, is the California State Military Museum, which earned about $2,000 a year as an Amazon affiliate. “That was our book-buying budget,” the museum’s director told the newspaper.

“I understand Amazon had their hand forced,” Edmondson said, “but we care about the thousands of authors we represent. Every single person lost that revenue. And the state is not getting the (sales tax) revenue they hoped to get because Amazon said that to be competitive, they couldn’t (comply) with the law and it was better to cancel all affiliate relationships.”

“We will continue to drop states that pass those affiliate laws from the affiliate program, Amazon CEO Jeff Bezos proclaimed in May, Reuters reported.

The states contend this is a matter of e-fairness. "Amazon has basically a 10 percent pricing advantage, and they're fighting like the dickens to keep it," Fiona Dias, executive vice president of strategy at GSI Commerce, a Pennsylvania-based digital marketing firm, told The Chicago Tribune.