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Mar 18, 2010

Colorado Law Wipes out Amazon Associates

I purposefully avoid writing about politics on this blog. But given the events of last week, I feel I have no choice but to speak up.  So I promise only a few informational posts and then back to tech.

What Happened?
The state of Colorado passed a law (House Bill 10-1193) in attempt to collect sales tax from Amazon. To protect their business, Amazon.com fired all their associates in the state of Colorado. The result according to the AP was the loss of 4200 small businesses and 5000 jobs in the state of Colorado.

What was the Goal of the Legislation?
Out of state Internet and mail order businesses, like Amazon.com, are not required to collect state sales tax in states where they have no physical presence.  This principle has been confirmed in several supreme court cases. Most recently, two cases address the issue directly.
  • In 1967, the U.S. Supreme Court determined in Bellas Hess v. Illinois that states could not require companies without either property or employees in the state to collect sales and use tax – in other words, companies needed a physical nexus.
  • The 1992 Supreme Court Case Quill v. North Dakota then reaffirmed the principle that a company must have a substantive nexus in order for the state to require the company to collect sales taxes.
Amazon.com and many other Internet companies offer Associate programs. These programs pay web site owners small commissions when site users are referred to Amazon.com and make purchases. The Associate takes no orders. Associates do not do any sort of fulfillment. The Associate only refers customers to Amazon. Once there, Amazon takes the order, sends the product, collects the money and essentially does all the work. Associate programs are very beneficial to both parties in the program.


The Democrat lead legislature in Colorado decided that Amazon would be an easy target for some additional sales tax revenue. The Colorado law (House Bill 10-1193) essentially states that anyone involved in an Associate program constitutes the "physical presence" required for a retailer to collect state sales tax. Amazon warned the state that if the law passed, they would have to shutdown their Associate program in the state. Their warning was ignored and here we are.


The Real Story on Tax Revenue and Fees

The goal of law was to raise an addition $4.7 million dollars in tax revenues. What Colorado legislators fail to realize is that Amazon Associates were ALREADY PAYING INCOMES TAXES on any money they received. Some bloggers and web site owners, with enough traffic, manage to make a living through advertising and Associate programs. Although I was hardly making enough money to "retire" I was making several hundred dollars a year from my relationship with Amazon.

With one stroke of the pen, the legislature and Governor Ritter wiped out any revenue Associates were getting.  Not only will Colorado not receive $4.7 million dollars from sales tax, they won't receive a dime in income taxes from the 5000 people they put of of business. In addition, the loss of Internet business income tax revenue could be catastrophic. Anyone doing business has a choice of where to incorporate or form an LLC. States known for being business friendly like Nevada, Delaware, and Wyoming, make it easy to setup a business in their state.

Will ANY Internet businesses incorporate in the state of Colorado now?  Will Colorado receive fees from these new companies?  Will Colorado lawyers be paid to setup these companies?  The answers are no, no, and no. Anyone with any sort of substantial Internet business will set up a corporation out of state in the next few weeks and/or months. Permanently exiling any state income tax revenue to another state.

What can you Do About It?
Call your state representatives and ask them to repeal the law.

If you can't wait, look into setting up an out of state corporation or LLC. I am looking into that myself and will report back with more information as I find it out.


For More Information
There is a lot more information out there from other Colorado bloggers that is much more detailed than this post.  I just wanted to write up a summary and give myself a chance to vent. :)

Ari Armstrong: Stop the Amazon Tax
Repeal the Amazon Tax - Some bloggers trying to get together to get the tax repealed.
Diane Hsieh: Colorado Screws Amazon Associates
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