Amazon fires more affiliates over Internet tax threats

Amazon's squabble with state governments which want to collect sales taxes from its shoppers continues, and now it's really heating up.

The trouble began in 2008, when New York passed a law requiring Amazon (and other retailers) to collect sales taxes if they had "affiliates" in the state. Amazon's affiliate program lets Internet users who operate their own websites sell merchandise via Amazon and get paid a commission for it. New York claimed that having these local affiliates meant Amazon was operating a physical "nexus" in that state, thus subjecting any sales there to New York state sales tax. Amazon sued the state, and lost. In defeat, the company now collects the tax on all New York sales, likely much to the chagrin of New York residents. 

Overstock, another company with a large affiliate program, didn't play ball, however. Instead it simply fired its New York affiliates and refused to pay the tax.

But now, other states, encouraged by the precedent, are trying to get in on what looks like free money, enacting similar laws mandating the collection of sales taxes when affiliates are located in the state. Specifically, North Carolina and Rhode Island are both on the verge of passing similar laws as part of their 2009 budgets.

This time Amazon's following in Overstock's footsteps, and in the last few days has informed affiliates in both NC and RI that they will no longer be allowed to partner with Amazon on e-commerce sales.

As this issue heats up, a monumental turf battle appears to be underway. States are almost unilaterally in deficit territory and are looking to scrape up every last penny they can. E-commerce companies, which have enjoyed the advantage of not having to collect sales taxes from most buyers, and have used that to their marketing advantage for years, don't want what little selling power they have taken away. And naturally, consumers don't want to be bled for another 8.5 percent or so on everything they buy, either.

Who will blink first? As much as I'd personally like Amazon to prevail, it's hard to see the states backing down on this one: The possibility of collecting millions more in sales taxes far outweighs any anger a few thousand affiliates, potentially stripped of a good chunk of their livelihood, might express.

Meanwhile, attempts to create nationwide ability for states to collect sales taxes for online purchases keep rumbling along, with the key bill involved still making its way through Senate committees. Its prospects currently seem questionable, but in this economic climate, you never know.

UPDATE: Hawaii affiliates also got axed today.