Amazon positioned to win state tax battle
This was originally posted at Between the Lines. It was updated at 3:25 p.m. PDT with Amazon adding Hawaii to the list of states where it's pulled its Associates program.
Amazon.com is in a high-profile tax showdown with states over its Associates referral program and is likely to come out a winner either way.
Amazon has pulled its Associates program, which allows Web site operators to drive sales to the e-tailer in exchange for commissions of up to 15 percent, in North Carolina and Rhode Island. And on Tuesday, Amazon also added Hawaii to its hitlist, according to The Wall Street Journal.
States are hurting for revenue and are trying to force Amazon to collect sales taxes on its associates. Simply put, states are trying to treat associate Web sites as if they are physical assets of Amazon.
Amazon's response: Cut out associates in the states where tax bills are proceeding.
Providence Business News reported that Amazon cut its ties with business affiliates in Rhode Island over a bill that would force it to collect sales tax on referrals via authors or businesses in the state. Amazon had the same reaction to a similar tax-happy move by North Carolina. These battles will be fought state by state, depending on the return on Amazon's marketing dollars.
Bernstein Research analyst Jeffrey Lindsay summarizes the situation:
The issue is collection of sales taxes--several states are trying tactics developed by then-Gov. Eliot Spitzer in New York to try to force Amazon to collect sales taxes on online sales made in their states. In 2008, Spitzer argued (and the courts upheld his view) that if Amazon has affiliates in the state where sales were made, that counted as "in-state" presence, and sales taxes must be collected.
Amazon's response to the latest move by cash-strapped states hoping to follow New York's lead has been to terminate relationships with in-state affiliates in a rapidly escalating game of chicken. It is not clear where this game may end, but clearly, Amazon is prepared to tolerate some pain to maintain its sales tax collection exemption for the majority of states.
While loss of affiliates in some smaller states may not be an insurmountable problem, it now looks as if California may be next to impose the "affiliate rule," and this may be more difficult to circumvent. Even if the states prevail, however, we do not believe the impact upon Amazon will be large.
Given Amazon's response and states' desperation for tax revenue, it doesn't take a brain surgeon to figure this showdown will escalate. What would happen if Amazon just shut down its Associates program in all states?
Amazon could win. Think about it: If Amazon was really dependent on the Associates program for a huge portion of sales would it really just pull it that quickly? Amazon in its SEC filings doesn't break out revenue garnered from its referral program or its total expense.
However, Amazon does drop a few hints. In a blog post, Amazon says, "We pay out hundreds of millions of dollars per year to Web sites that advertise our products."
In other words, these commissions can add up:
Amazon.com commissions, or referral fees, can indeed add up.
(Credit: Amazon.com)In Amazon's SEC filings, it explains that the Associates program falls under its marketing spending line. According to Amazon's annual report:
We direct customers to our Web sites primarily through a number of targeted online-marketing channels, such as our Associates program, sponsored search, portal advertising, e-mail campaigns, and other initiatives. Our marketing expenses are largely variable, based on growth in sales and changes in rates.
To the extent there is increased or decreased competition for these traffic sources, or to the extent our mix of these channels shifts, we would expect to see a corresponding change in our marketing expense or its effect.
Marketing costs increased in absolute dollars in 2008, compared to 2007 and 2006, due to increased spending in variable online-marketing channels, such as our Associates program and sponsored-search programs.
While costs associated with free shipping are not included in marketing expense, we view free-shipping offers and Amazon Prime as effective worldwide marketing tools, and intend to continue offering them indefinitely.
The big question is whether Amazon's referral program accounts for the bulk of the company's marketing expense. For the year ended December 31, 2008, Amazon reported marketing expenses of $482 million, up from $344 million in 2007 and $263 million in 2006.
It's hard to quantify the connection between referrals and Amazon's sales, but chances are good that the company has word of mouth, habits, and low prices at its back these days. Simply put, if Amazon cuts its Associates program in every state, its marketing expenses would fall dramatically and ultimately boost earnings. And Amazon would likely land the sale, anyway. Meanwhile, these small businesses that like Amazon's commissions will be screaming at their state legislators.
JPMorgan analyst Imran Khan writes in a research note:
Although the affiliate network changes could result in some lost sales, Amazon will have the ability to shift marketing spend into other arenas. We think the company can continue to focus its marketing on the areas that deliver the best (return on investment), mitigating the impact of losing some affiliates.
The state tax flap is an interesting showdown, but Amazon has done the math internally. The e-tailer appears confident that it can win a game of chicken.
Larry Dignan is editor in chief of ZDNet and editorial director of CNET's TechRepublic. He has covered the technology and financial-services industries since 1995. 
According to my elected official here in PA, its just a piece of paper.....
The issue here is not about taxes, but enforcement of who should COLLECT the taxes: the state, or the vendor. Amazon's argument is that it is not feasible for them to keep track of the thousands of different city, county, and state tax rules and rates and enforce that collection themselves. Amazon believes the right answer is to simplify the tax code and supports the Streamlined Sales Tax Project (www.streamlinedsalestax.org). I think this is a valid position to take, personally.
That's not to say I won't miss being able to buy stuff online and not pay sales tax on it, but, it's fair to say I should have been reporting those purchases and paying taxes all along. This has ALWAYS been a loophole just waiting to be closed. The question is really what is the most appropriate way to close it.
kswartz is right. Sales tax is supposed to be collected by the companies when they have operations in the state. Dell has a call center in my state. They collect sales tax when I purchase from them.
If a North Carolina based busines has a North Carolina Customer they are supposed to collect the sales tax. That they use Amazon as a "front" (out of business convenience and not so much trying to dodge sales tax collections) doesn't change the law. The problem is that Amazon doesnt' have a good way for a NC firm to say "we need to collet NC tax" so that it's automatic in the online storefront that amazon is providing.
The origin of the income tax on individuals is generally cited as the passage of the 16th Amendment, passed by Congress on July 2, 1909, and ratified February 3, 1913;
From Amazon's perspective, the real issue isn't the associates program, it's the impact on sales when people have to pay both shipping and sales taxes. How much does that hurt, particularly in contrast to more specialized online sites with lower prices, free shipping, and no sales tax because they pay no referrals fees and only exist in one state or even overseas? People may begin to use Amazon as a research stop like they do brick and mortar stores, figuring out what to buy via the user reviews there but buying elsewhere for less.
And don't forget that others are taking up Amazon's affiliate idea and doing it better. It's always irked me that Amazon makes it too hard for me to get paid for referrals to overseas Amazon stores even though I link to them at my website. That leaves me feeling cheated. Heck, I am being cheated!
There's now an alternative for all those overseas who come to my website and want to buy my books. The Book Depository in the UK beats Amazon for international sales. It ships books almost anywhere in the world for free via Priority Mail and pays affiliates 5% on all sales with a single affiliate registration. In many cases, it also beats Amazon's prices. I'm considering dumping or downgrading all my links to those free-loading Amazon stores outside the U.S. and going with them.
It's not hard to do, but there is one big problem: it would not be fair to states that have a low sales tax and high property tax. To be fair, other tax rates would need to be adjusted. That said, I'm all in favor of getting rid of property taxes entirely. It amazes me we live in a country where if one loses his job and cannot pay the property taxes on his home, his property is taken away and he's booted into the street. That's just not right.
But, so many things about our complex systems of taxation are not right. I suspect we could go on forever about this. Even so, to impose a national "Internet Sales" tax at some given rate would likely boost revenue for all states today... and the inconsistencies can be worked out over time.
Internet Radio was pretty much driven off the air when the artists demanded four times the fees for having their golden voices carried over TCP/IP than they did by their broadcast stations. And how long do you think it will be before the Feds have a National Internet Tax that they will "share" with the States -- and also permit the States to gouge out even more for themselves. Hey, if they can pass a law two days ago that stole the right of how to build your house away from a clown five miles away in town hall and gave it to a gigantic new agency in DC, they can and will do anything they feel like.
Of course it will hurt overall business -- but the guys who we elect to pass our laws don't care. And we're so stupid that we keep electing them. Pretty soon we who work will be out of time -- there will be more voters working for or on the dole of the government and why would they do anything to the hand that feeds them?
I'm rooting for Amazon.
What happens when income disappears? People have no money to spend & no earnings means no state or fed income tax.
I'm behind Amazon! Just going to begin using my affiliation and live in CA. DON"T DO IT CALIFORNIA!
NO TAXES ON AFFILIATION INCOME!
- by gregspira July 3, 2009 5:21 AM PDT
- Amazon doesn't need the affiliates programs; at this point they serve more as public relations than to generate leads. Other online retailers can't follow in Amazon's footsteps nearly as easily; they need the leads they get from affiliates
- Like this Reply to this comment
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(16 Comments)Amazon has agreed to charge sales tax for states if the states can ever get together and simplify their taxing structure as the Supreme Court suggested in their last ruling on the matter. It's been 17 years since that ruling, though, and the states have yet to get their acts together. I have to think is is going to happen at some point in the next decade, however.
Of course legally, in states with sales taxes, consumers are supposed to be paying these taxes when the retailer doesn't collect them in the form of use taxes sent directly to the government. In fact, if a citizen residing in one state travels travels to another state with a smaller sales tax and purchases items that are subject to the sales tax in both states, they are supposed to pay the difference in the sales tax charges as use tax to their state government.
Of course, the government rarely enforces these laws except in cases of large purchases such as new cars and expensive artwork.