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More states propose Internet sales taxes

As Amazon.com cancels its affiliate program in Colorado in response to a new state law, 14 other states have considered or are considering similar measures.

Declan McCullagh Former Senior Writer
Declan McCullagh is the chief political correspondent for CNET. You can e-mail him or follow him on Twitter as declanm. Declan previously was a reporter for Time and the Washington bureau chief for Wired and wrote the Taking Liberties section and Other People's Money column for CBS News' Web site.
Declan McCullagh
4 min read

Jeremy Bray received an e-mail message this morning with an unwelcome surprise: Amazon.com told him it had canceled its affiliate program, which provides small payments for referring customers, for everyone in the state of Colorado.

The reason? A state law, which Democratic Gov. Bill Ritter signed last week, slaps onerous new restrictions on large out-of-state sellers like Amazon, which said it has no choice but to end its marketing program in response.

Bray, a blogger who has lived in Pueblo, Colo., for more than 20 years, told CNET on Monday that he's now trying to "bring as much attention to the issue as possible in hopes of getting Colorado to repeal" the new law.

Colorado is not alone. Fifteen other states have considered or are considering enacting laws targeting Amazon and other e-commerce companies that typically do not charge sales tax for shipments sent outside their home state, according to a report released Monday. Four states including Colorado have already enacted them.

"I see this as a trend moving along--a lot of states are considering doing it," said Joseph Henchman, director of state projects at the non-partisan Tax Foundation in Washington, D.C., which published the report. But, Henchman says, the laws "won't solve short-term budget problems, they signal business-unfriendliness, and they're probably unconstitutional."

The justification for the laws is a reprise of arguments that state tax collectors have made for at least a decade: they claim that Amazon, Overstock.com, Blue Nile, and other online retailers that don't collect taxes are unreasonably depriving states of revenue, and that they enjoy an unfair competitive advantage over local retailers that must collect taxes.

On the other hand, a 1992 Supreme Court ruling says that, in general, retailers can't be forced to collect sales tax on out-of-state shipments unless they have offices in those states.

New York, North Carolina, and Rhode Island have enacted laws saying that if a retailer runs an affiliate program with referral payments, that's enough to trigger tax collection requirements. California, Illinois, Iowa, Maryland, New Mexico, Vermont, and Virginia are among those states with similar measures currently pending; in Virginia, one chamber of the state legislature has approved the bill.

"This is a huge trend and it's one that we think is misguided," says Braden Cox, policy counsel for the NetChoice coalition, whose members include eBay, Expedia, and Yahoo.

While states hope that this will raise tax revenue, Cox says, anti-Amazon laws could actually reduce revenue by forcing retailers to curtail affiliate programs. "Who are the companies that are the affiliates? They're small companies...If Amazon and others break that relationship, it's the small companies in those states that are going to be hurt."

Probably the highest-profile anti-Amazon law to date is the New York version, which was enacted two years ago. Amazon responded with an immediate lawsuit claiming the statute was unconstitutional because an affiliate program does not amount to a presence in the state; it lost before a trial court and has appealed.

Brad Maione, director of the state tax department's public information office, declined to comment except to say the lawsuit is "ongoing and we're awaiting a decision." Amazon did not respond to requests for comment on Monday.

While New York, Rhode Island, and North Carolina are attempting to force Amazon to collect taxes directly, the final version of the Colorado legislation removed the affiliate portion but did include a requirement that Amazon notify residents that they are required to pay taxes. (The concept is known as a "use tax," meaning residents of a state with a high tax rate shopping in a low-tax state are legally obliged to pay the difference.)

Michael Mazerov, a senior fellow at the Center on Budget and Policy Priorities, which has defended New York's approach, says the outcome of the appeals process could influence other states.

"If the appellate court upholds the trial court's decision, then I do think there will be additional states that will look very seriously at this," Mazerov said. "And I think other states will look seriously at what Colorado has done." It's reasonable, he said, "for states to take action to ensure that their in-state business are not harmed by out of state businesses."

In Colorado, the response among Web publishers that rely in part on revenue from affiliate links has been furious. On Twitter, comments have included ones like: "Amazon just dropped me as an affiliate, killing my new business." "Thanks Colorado gov! You just put so many people out of work!" "Colorado legislature raised state unemployment with this."

"Signing these bills was not something I wanted to do," Ritter, the Democratic governor, said in a statement. "But it was something that was necessary in order to keep the budget balanced...My sincere thanks to those lawmakers who supported this package of bills and made the difficult but right decisions for the future of Colorado."

Greg Brophy, a Republican state senator and assistant minority leader, told CNET that he'd like to introduce an emergency repeal measure and has been talking with the Democratic leadership.

"I have discussed the possibility of a repeal with leadership," Brophy said. "They are meeting this afternoon, but after their initial reaction, I don't hold out a lot of hope."

Update 7:40 p.m.: The Denver Post has posted a comment from Colorado Gov. Bill Ritter, a Democrat who signed the bill into law last week: "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."