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Carol Hedges

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The Real Story on Amazon and Colorado

Posted: 03/09/10 07:19 PM ET

On Monday, Amazon.com notified its Colorado business associates that it had terminated all business relations with them effective immediately. According to Amazon, the reason for this sudden "firing" of Colorado affiliates was because the state had "enacted a law to impose sales tax regulations on online retailers." The announcement sent ripples through the online community and made a splash at the Colorado Capitol. Finger pointing started immediately, with the Republicans blaming the Democrats and the Democrats blaming Amazon.

However, firing the Colorado affiliates in no way changes Amazon's obligation under Colorado law. The law did not depend on local affiliates at all; they were taken out of the equation long ago.

So why did Amazon.com end business relations with Colorado affiliates?
1. To put political pressure on Colorado legislators to change the new tax law and
2. To use Colorado as an example to scare other states from doing the same

The answer appears easy, but the explanation is a little more complicated. To explain it, I'm going to start from the beginning.

Under Colorado law, everything you buy on the Internet is subject to tax. In fact, you already pay tax for most of what you buy on the Internet. If you buy pants from Sears.com or shoes from Target.com, you automatically pay tax (and you probably haven't noticed). That is because these stores have a physical presence in the state, so they are legally compelled to collect the tax.

However, if an Internet retailer does not have a physical presence in the state, it is are not compelled to collect tax, even though the consumer still technically owes the tax. The law in question (HB10-1193) states out-of-state retailers need to either collect the tax or make the consumer aware they owe the tax to Colorado.

This bill had several positive outcomes. First, it attempted to level the playing field between Colorado businesses and out-of-state Internet giants. For this reason, the Colorado Retail Council supported the bill. Colorado businesses were at a competitive disadvantage because they were obeying the law and collecting sales taxes. Amazon.com did not have to collect this tax, giving them a price advantage over in-state stores. Collecting the tax it was due would also help Colorado avoid making deeper service cuts to K-12, higher education, and other public services.

Obeying the law is not overly burdensome for Amazon. Target.com already collects tax; in fact Amazon makes the online checkout software for Target.com.

Amazon said that it did not intend to follow this new Colorado law. Instead of simply trying to reverse the law in courts, Amazon went a step further and needlessly fired all of its Colorado affiliates, apparently out of spite. Amazon took out its anger on Colorado affiliates to make a political point.

Amazon is trying to bully Colorado to keep the state from collecting the sales tax it's due. Are we going to succumb to Amazon's pressure and forget about the sales tax? Or can we convince Amazon to obey the law?