Taxes & Spending

Colorado Internet Retailer Tax Backfires

More evidence that if you want less of something, tax it: The so-called "Amazon tax" on Internet retailers.

In February, Colorado became the fourth state to approve the tax, which requires Internet retailers with in-state "affiliates" — individuals operating websites with links to cyber-companies like Amazon.com — to collect the state sales tax. New York, North Carolina and Rhode Island have already passed their own Amazon taxes.

Colorado Democrats predicted that revoking what they described as the Internet sales-tax exemption would bring an additional $5 million to the state’s depleted coffers. Instead, it appears the Democrat-controlled legislature has killed an entire industry at the cost of as many as 10,000 jobs.

Almost immediately after Colorado Gov. Bill Ritter signed the legislation, Amazon struck back. The company sent out emails to its associates informing them that it would cease its affiliate program in Colorado. That means Colorado website operators can no longer earn income by referring customers to Amazon through links and advertising on their sites.

Brad Feld, a longtime Amazon affiliate through his website Feld Thoughts, responded with a post entitled, "Amazon Fires its Affiliates in Colorado (Including Me) Because of Colorado HB 10-1193." In the post, he kicked himself for not doing more to lobby against the bill, saying, "I made a huge mistake."

"I’m not at all surprised by this action on Amazon’s part," said Feld. "I expect the Internet affiliate business in Colorado will completely die within the next 30 days."

There’s a good reason Feld wasn’t surprised: Amazon did the same thing in North Carolina and Rhode Island after similar legislation passed in 2009. Other Internet companies followed suit in those states, thus eradicating thousands of jobs and opportunities for those attempting to enter the web-based market.

Legislators in both states had predicted the state would reap a financial windfall. Instead, Rhode Island officials reported in December that the six-month-old law had produced no revenue. North Carolina officials have refused to comment, according to Joseph Henchman, tax counsel with the Washington-based Tax Foundation.

New York has actually lost money. Shortly after the 2008 law was enacted, Amazon filed a lawsuit, thus forcing taxpayers to foot the bill for protracted litigation.

Colorado lawmakers did make an effort to avoid the North Carolina-Rhode Island situation by removing language that required affiliates to collect the sales tax. Instead, the law requires online retailers to inform Colorado buyers that they owe sales tax. Retailers who refuse to comply would be fined $5 per unsent invoice.

Given Amazon’s response, Colorado Republicans hoped the Democratic majority might respond by acknowledging its overreach and trying to win Amazon back. Instead, Democrats have exercised the class-warfare option, blaming "corporate greed" for costing Coloradans their jobs.

"While Amazon is blaming a new state law for its action, the fact is that Amazon is simply trying to avoid compliance with Colorado law and is unfairly punishing Colorado businesses in the process," said Ritter in a statement.

Efforts by Republicans, led by state Sen. Greg Brophy, to persuade the Democratic majority to repeal the law have run aground.

"It sure appears they’ve decided they’re not interested in repealing those exemptions," said Brophy. "They’ve decided to make Amazon the issue, and it appears they’re willing to sacrifice Colorado residents on the altar of Internet exemptions."

Those in favor of the Amazon tax argue that it levels the playing field with brick-and-mortar companies that are subject to state sales taxes. What they fail to take into account is that the local WalMart only has to charge one sales-tax rate based on its physical location. An Internet retailer must base the tax on where the customer is located, meaning that the company must keep track of more than 8,000 constantly changing sales tax rates, bases and jurisdictions.

"The software to keep track of what’s taxed, what’s not, what’s the tax rate in every jurisdiction, doesn’t exist," said Henchman, whose report, "’Amazon Tax’ Laws Signal Business Unfriendliness and Will Worsen Short-Term Budget Problems," was released March 8. "It’s tough to do, and these people aren’t tax lawyers."

Indeed, Internet affiliates are often mom-and-pop cottage industries, run by people with an entrepreneurial spirit but without any special training in accounting or tax codes. "These laws actually create a disparate burden on affiliates," said Henchman.

The best hope for the shuttered affiliates may be the case making its way through the New York judicial system. The trial court found the state’s Amazon tax constitutional, but the case is under appeal. Brophy predicted the Colorado law would also wind up in court.

"The second they try to charge people that $5 fee, Amazon’s going to take them to court," said Brophy. "In the meantime, Colorado residents are being hurt. And obviously the state’s not going to make any money when people don’t have jobs."

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