States' 'Amazon Tax' Seems to Hurt Revenue, Not Boost It

With the April 15 deadline to file income taxes looming, and with the Great Recession putting pressure on states with increasing budget shortfalls, one quick-fix measure that's taken hold is to crack down on retailers that sell their wares across the country by forcing them to charge sales taxes. This "Amazon tax" particularly targets affiliates that link to products and collect a cut of sales from anyone who clicks through, putting the onus on retailers like Amazon (AMZN) to collect state sales taxes.

Naturally, Amazon hasn't been happy with such measures, and it responded by ending affiliate programs in both North Carolina and Rhode Island last June, after both states announced retail sales tax measures. And it's threatening to sue New York for similar new laws. (Residents of New York, including me -- I use Amazon affiliate links on my personal site -- have not been affected, as the case moves through the courts.) Now the retailer has applied the same strong-arm tactic to Colorado, which enacted legislation last month that, instead of forcing sales tax collection, would implore Amazon and others to inform residents how much they owe in sales tax on Web purchases both at checkout and in a year-end summary, according to TechFlash.

Amazon made its intentions clear in a letter to Colorado affiliates. "Regrettably, as a result of the new law, we have decided to stop advertising through Associates based in Colorado. We plan to continue to sell to Colorado residents, however, and will advertise through other channels, including through Associates based in other states."

With other sales-tax collection bills up for debate in cash-strapped Virginia, Illinois and, especially, Calfornia -- which is starting anew after a similar bill failed last year -- Amazon's affiliate cutoff may extend throughout the country, much to states' displeasure.

Then again, expecting affiliate sales-tax collection to overcome even a small part of overall budget deficits may be a tall order. Six months after Rhode Island passed its law, the state has not seen appreciable revenue increases. Paul L. Dion, who heads the revenue-analysis office for the state Department of Revenue, told the Rhode Island Business News that officials "do not believe that there has been any sales tax collected as a result of the Amazon legislation."

That contradicts research conducted by the University of Tennessee, which estimated that Rhode Island would be out $132.7 million in sales tax revenue from 2007 through 2012, or 2.5% of the state's total 2007 sales tax collections. Instead of collecting more tax, Rhode Island gets less, and affiliates aren't earning as much income.

The Tax Foundation, a nonprofit think tank, argues, "Enacting an Amazon tax law also sends a signal of hostility to businesses engaged in interstate commerce, runs the serious risk of retaliation from other states and from affected businesses, and undermines efforts to improve the uniformity of state sales taxes."

For cash-strapped states, going after Amazon, with its coffers plumped up by record fourth-quarter earnings and profits, seemed like a good way to level the playing field. But states' moves to defeat a so-called Goliath may continue to backfire, alienating residents who just wanted to earn a little bit of side income in a recessed economy.