Amazon Terminates Affiliates in a Bid to Intimidate State Lawmakers

Amazon is treating its Colorado sales affiliates as "human shields," to use the words of one Denver Post columnist, in what has become a aggressive campaign to overturn a new Colorado law and scare other states away from extending sales taxes to large online retailers.

Earlier this year, Colorado was considering a bill that would have required out-of-state retailers that generate sales through in-state affiliates to collect sales tax. The bill was modeled on similar legislation adopted in New York, Rhode Island, and North Carolina.

Amazon relies on about 3,000 sales affiliates in Colorado. These are businesses and individuals who promote products and use their web sites to drive customers to Amazon.com, for which they receive a percentage of any resulting sales. (Because they are based in the state, they provide the legal "nexus" a state would need to compel remote companies to collect state and local sales tax.  More on the legal issues here.)

In a bid to stop the bill, Amazon threatened to fire all of its Colorado affiliates. The affiliates then descended on the Colorado statehouse to fight the bill, becoming, in effect, a grassroots lobbying arm for Amazon.

Lawmakers then came up with a compromise. The final bill, which passed in late February, took affiliates out of the equation. Rather than requiring Amazon and other internet retailers to collect sales tax, the law instead stipulates that they must inform Colorado customers that they owe state sales tax when they make a purchase.

In most states, out-of-state retailers are not required to collect sales taxes, but customers still owe the tax and are suppose to include it on their state income tax returns. But few people do and it's virtually impossible to enforce. Colorado's new law aims to increase compliance.

Colorado's compromise was pretty generous. It protected affiliates and allowed Amazon to continue selling goods in Colorado without having to collect taxes, a substantial competitive advantage over local retailers.

Nevertheless, in a move that shocked and angered many affiliates, Amazon decided to fire them all anyway. "Terminating relations with Colorado affiliates doesn't do anything to change Amazon's obligations under [the new law]; it just harms a lot of people who have worked hard to build internet marketing businesses in Colorado," said Marc Braunstein, owner of ShopAtHome.com, an Amazon affiliate that employs 50 people.

Firing its Colorado affiliates does not allow Amazon to avoid the new law. So why would it do so, given the ill-will incurred and near certain loss of revenue? The main point seems to be to send a message to the growing number of states that are considering bills related to online sales taxes. Amazon's take-no-prisoners strategy is an attempt to intimidate lawmakers and ensure that affiliates are fighting on the frontlines in every one of these states.

Given the resources the company has spent, both in Colorado and in an ongoing lawsuit fighting New York's law, Amazon clearly believes that its competitive position would be significantly harmed by having to comply with the same sales taxes that its local competitors are required by law to collect.

In 2009, Amazon earned 3.7% profit on $24.5 billion in sales. The average combined state and local sales tax rate is 8.6%.

"With its latest salvo, it is manifestly clear … that legislators' efforts to bend over backwards to placate this corporate giant in an effort to shield in-state affiliate businesses are pointless," wrote a group of independent booksellers and other retailers in an open letter to the governor. "There are 30,000 retailers in the state that are being hurt by sales tax inequity. Something had to be done to protect [them] and the approximately 438,000 people they employ. We certainly hope Amazon's recent decision doesn't convince you otherwise."

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