Amazon Cuts Ties With Calif. Affiliates To Avoid Tax

Under a new law signed by Calif. Gov. Jerry Brown, online retailers like Amazon are supposed to start collecting sales taxes, even when they're based outside the state. Amazon says the new law is unconstitutional, and it won't collect the tax. One way the company is trying to avoid it, is by severing ties with about 10,000 small businesses and individual blogs based in the state which link to Amazon.com through their websites.

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If you ever buy stuff online, there's a good chance you bought something without paying sales tax. Starting today, that is not supposed to happen in California. Under a new law signed by Governor Jerry Brown, online retailers like Amazon and others are supposed to start collecting sales taxes even if they are based outside the state. Amazon says the new tax law is unconstitutional and it says it will not collect the money.

One way the company is trying to avoid it is by severing ties with about 10,000 small businesses and individual blogs based in the state which link to Amazon.com through their websites. NPR's Wendy Kaufman explains.

WENDY KAUFMAN: California needs money and state officials say the new sales tax could bring in two to three hundred million dollars a year. Amazon wouldn't be paying more in taxes, just collecting the sales tax on customer purchases and passing it on to the state just like brick-and-mortar retailers do now.

Mr. BILL DOMBROWSKI (California Retailers Association): The retail industry has said enough is enough. We have to do something about this.

KAUFMAN: Bill Dombrowski heads the California Retailers Association - a trade group that pushed for the new law. He says online retailers have had a built-in price advantage because consumers often didn't pay any sales tax.

Mr. DOMBROWSKI: In California, that meant they had a 10 percent roughly price advantage every day of the year, and shoppers were turning our stores into showrooms and then going out and shopping on the Internet.

KAUFMAN: But collecting sales tax from Internet sales can be tricky. In a landmark 1992 case involving a mail order company, the U.S. Supreme Court said retailers can't be forced to collect taxes unless they have a physical presence in that state.

So here's what California's doing. It essentially calls California-based companies and bloggers part of Amazon if they have links to Amazon on their websites and get sales commissions for sending shoppers to the online giant. Amazon's solution? It cut them off. If the 10,000 or so companies, bloggers and others no longer receive any money from them, they can't be connected to Amazon.

Savings.com is one business that got a termination notice. It used to make a sizeable amount of revenue from referring customers to Amazon. Now, says Savings.com's Thomas Swalla, that income is gone.

Mr. THOMAS SWALLA (Savings.com): I definitely understand the intention of what the lawmakers are trying to do. Unfortunately they affected businesses that are going to hire people and invest in their state. And it's a real effect. I mean, it has a real financial impact.

KAUFMAN: He says Savings.com may be forced to pack up its office and move to another state where it will still be able to get sales commissions for online sales referrals.

Danny Sullivan, an influential search engine blogger who had links to Amazon on his site and has received small commission payments, suggests that Amazon's tactics carry a tinge of blackmail.

Mr. DANNY SULLIVAN (Blogger): It felt like Amazon wanted to use the affiliates as a kind of a pawn in all this, that by cutting loose these people, that they will go forth and try to get the law changed.

KAUFMAN: Amazon calls the new tax law unconstitutional and counterproductive. The company declined our request for an interview, but Amazon has argued that it's unreasonable and unfair to compel online retailers to collect sales taxes in 50 states with different rules and different rates. The company has said it would support some sort of national standard on the sales tax issue.

But for now the focus is on California. While Amazon is terminating payments to those who send them business, the company still has offices in California. And the state will no doubt try to get the sales tax it thinks it's entitled to. Amazon will surely fight, just as it's done in the six other states that have passed similar tax laws.

Wendy Kaufman, NPR News.

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