As Vote Looms on North Carolina Affiliate Tax, Amazon Warns Partners

  |  June 18, 2009   |  Comments

If budget bill passes, North Carolina will be the second state after New York to tax affiliate sales.

Amazon has put all of its affiliate partners in North Carolina on notice that they will no longer be paid their 15 percent commission when a tax on Internet affiliate sales passes the state legislature, as is expected by the end of the month.

The new tax was stalled in the state's house of representatives, but has now been tacked on to an omnibus budget bill. The Performance Marketing Alliance, which tracks affiliate legal matters, says it will be passed by the senate before going to the governor's desk June 30. North Carolina will be the second state, after New York, to tax affiliate sales. Amazon and Overstock have both appealed the New York statute, but continues to pay affiliates there. In North Carolina, Amazon has drawn the line of paying affiliates while the legal appeals process is in motion, arguing it's simply too expensive.

"I don't think lawmakers or affiliates understand the full weight a company has to bear when states tax affiliate sales," said Rebecca Madigan, founder of the PMA. "The administrative hassles of taxing each zip code, each county, and even each city are onerous. But state governments are crazy desperate to find some kind of revenue source in this economy, so Internet sales and affiliate sales look like easy targets."

Similar tax plans have been voted down in Maryland, Minnesota, and Tennessee. They are still being considered in Connecticut, Hawaii, Rhode Island, and Wisconsin. Amazon and the PMA claim that local taxes are unconstitutional, based on a 1992 Supreme Court ruling that said retailers must have a physical presence within a state for that state to require sales tax collection. The decision says that Congress's power to regulate interstate commerce implicitly denies such power to the states. It also held that only Congress, through legislation, could delegate broader powers to the states.

Amazon, in its notice to North Carolina affiliates, was clear about the broader implications. The notice said, in part, "Because the new law is drafted to go into effect once enacted -- which could happen in the next two weeks -- we will have to terminate the participation of all North Carolina residents in the Amazon Associates program on or before that same day."

The issue has a lot of momentum. Even the San Francisco Examiner, which is usually pro-business and whose constituency is decidedly pro-Internet, ran a recent editorial in favor of an Internet sales tax in California. Madigan says the California effort is starting to show some weakness, mostly because it makes no fiscal sense.

"By our analysis a state stands to lose much more in income tax than it would gain by collecting an affiliate tax," she said. "But I think this is going to keep raising its head fairly consistently until the New York case is resolved. And that could take up to two years."

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