Online Sales Tax Brouhaha Hits More SMB Amazon Affiliates

Amazon.com has dropped affiliate relationships with small businesses in North Carolina and Rhode Island as the states prepare to implement new laws requiring the company to collect online sales tax.InformationWeek reports that Amazone has cut ties with "scores" of small companies that had been working as affiliates of the online shopping site. North Carolina, like other states, is working on a tax on "click-through" transactions, and Amazon is fighting back.

Amazon has also threatened to quit doing business with affiliates in California and Hawaii, if those states try to force the company to collect online sales taxes. The impetus for all this is the idea that by having affiliates in a given state, a company can be seen as "doing business" in that state, which can obligate it to collect the taxes. Companies with a physical presence in a state already have to collect the taxes.

New York has already adopted a similar law, and Amazon has kept its affiliates and is collecting tax there, though it is also challenging the law's constitutionality in court. (Overstock.com, meanwhile, canceled its New York affiliates.)

Of course, online shoppers are already supposed to pay their local sales taxes on all online purchases, but in reality few do. Governments are trying to force online retailers to collect those taxes, just as local merchants do. But the situation is much more complicated online, where it's not always clear what taxes apply. A buyer's legal esidence may not match his billing or shipping addresses, for example. And what about downloads of songs or software? Where is the appropriate location to calculate taxes for that?

Note that Maryland, Minnesota, and Tennessee have all rejected proposals for similar laws. And everyone is waiting for the Feds to weigh in. There was a bill a couple years ago that would force all online retailers with more than $5 million in sales to collect tax nationwide, but it has yet to pass.

Bottom line? Expect this issue to continue to spread confusion for at least the next couple years. ITE (in this economy) states are stuck between trying to close big budget deficits and avoiding hurting local businesses.

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