Tax happy states cut off business for Amazon associates

As states try to find revenue anywhere they can, Amazon (AMZN) associates may find themselves out of business. Amazon has already cut off associates in two states -- Rhode Island and North Carolina. Both states wanted the retailer to collect state's sales taxes generated by Amazon associates located in their state. Amazon doesn't want to do that and instead sent emails to the associates ending its business relationship.

Now the states won't get the additional revenue and they've cut off income of some of their citizens -- a lose-lose situation for everyone. States are taking the position that associate websites are among the physical assets of Amazon, so therefore they can tax revenue generated by those websites. Rhode Island passed the legislation, which still sits on the governor's desk for signature, but since the bill passed with a veto-proof majority, Amazon assumes it will become law.
Rebecca Madigan, a founder of the affiliate trade group Performance Marketing Alliance, told The Wall Street Journal there are about 2,000 online affiliates in Rhode Island, who pay about $3 million in state income tax. "We're seeing small businesses being hit. They are the collateral damage through all of this legislation, which inaccurately classifies affiliate marketers as sales agents" rather than advertising channels, Madigan said.

Associates drive traffic to Amazon for commissions of up to 15 percent, but Amazon considers this a marketing expense. It does not consider these associates as physical assets of the company. Amazon says on its blog, "We pay out hundreds of millions of dollars per year to websites that advertise our products." Other key components of its advertising include sponsored search, portal advertising, and email campaigns.

Larry Dignan of ZDNet doesn't believe Amazon would be hard hit even if the associates program had to be dropped completely because of tax happy states. He wrote in his blog, "Simply put, if Amazon cuts its Associates program in every state its marketing expenses would fall dramatically and ultimately boost earnings. And Amazon would likely land the sale anyway. Meanwhile these small businesses that like Amazon's commissions will be screaming at their state legislators."

I agree. Amazon will win this fight and small business owners who depend on Amazon commissions will be the losers. States won't gain anything either. As they cut off these business channels, the tax revenues will never appear and they could end up with more citizens unemployed.

Lita Epstein had written more than 25 books including Bookkeeping for Dummies and Trading for Dummies.

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