Amazon and Others Fight Internet Taxation

Several states are trying to capitalize on the increasing popularity of e-commerce as a way to collect revenue to apply to massive debts. However, their attempts may actually prove to be counterproductive, because e-tailers are rebelling and taking their business elsewhere, rather than knuckling under to the imposition of Internet taxation. The battle was started by Amazon.com, but now other companies are jumping on the bandwagon.

Amazon has dropped its affiliate programs in Rhode Island and North Carolina, and reportedly Hawaii as well. Affiliate programs give individual website operators the opportunity to set up online stores through a larger online retailer, such as Amazon, and then those affiliate stores channel potential buyers to the parent site. Affiliates have been a vital part of the growth of Amazon, because their online stores bring consumers to Amazon’s site, from which they may buy Amazon products. Online retail sites Overstock.com and Blue Nile have joined Amazon in canceling their affiliate programs in Rhode Island and North Carolina.

Lawmakers in all three of these states have passed or are considering laws that would demand online retailers such as Amazon to collect sales tax from customers who purchase products from their affiliates located in those states. Because sales everywhere have dried up due to the recession, other states may also begin to consider taxing Internet sales. Most states are already taxing online purchases made from sites that operate brick-and-mortar storefronts in the states, such as stores like Wal-Mart, Target, and Best Buy.

However, the online retailers balking at Internet taxation say that the legislation proposed by the states is unconstitutional. According to Blue Nile, these laws require sellers who do not have a physical presence in those states to still collect sales tax from buyers located in those states. The online retailers who have already dropped affiliate programs in states that have passed these laws are considering taking similar actions in any other states that threaten to enact Internet taxation laws.

The taxation laws probably affect the affiliates more than they do the giant online retailers in the short term, but the move by Amazon may prove to be counter-productive to their future growth. Amazon is currently handing out a lot of business to its affiliates, in an effort to create an online marketplace. This strategy is critical to the continued growth of the popularity of Amazon as an "all-in-one" place to shop.

However, the behavior of online customers has demonstrated that avoiding sales tax isn’t really all that important to them in deciding whether to purchase an item online or at a local store. The convenience of buying something from the bedroom computer outweighs having to pay sales tax, which they would have to do anyway if they did drive to a store. Therefore, Amazon may not actually lose very much in purchases from traditional online retailers if both companies are taxed.

The biggest fallout that might happen as a result of the ongoing battle about Internet taxation could be that affiliate programs might take their business overseas. Right now, Internet advertising and sales can be conducted by almost anyone, anywhere in the world. But if states continue passing laws that impact Internet sales by local retailers, their local Internet business may evaporate and more local citizens will find themselves out of work. Not the most pleasant outcome given the current state of the economy.