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Amazon.com Tactics Draw Harsh Criticism

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The day after Amazon.com abruptly terminated its Associates Program in Colorado, the Colorado chapter of the advocacy group ProgressNow, announced, "We won't be bullied." The group called on its 200,000 members to boycott Amazon.com, claiming that Amazon's action was just a stunt to deprive Colorado of much needed revenue and protect Amazon.com from competition:

"After profiting from millions of dollars in tax-free sales to Colorado residents for years, Amazon.com is determined to protect their unfair advantage over local brick-and-mortar retailers."

ProgressNow is just the latest group to get upset over Amazon's tactics. A month ago the Author's Guild denounced Amazon.com's pressure tactics against publishers that resulted in hundreds of authors getting D-listed from the Amazon website. According to the Guild, this has been a recurring practice by Amazon.com:

"Amazon's developed quite a fondness for employing this draconian tactic; it's only grown bolder with its growing market clout."

Amazon's cut-off tactics have gotten so serious that the Author's Guild has set up a special website called Who Moved My Buy Button to check into these kinds of situations. As far as the Guild is concerned, "We believe Amazon should be monitored for years to come."

The Latest Move

According to ProgressNow, Amazon.com is now "playing political football with Colorado Business Partners" by dropping them in response to a law passed by the state legislature. That law would impose sales tax-collection responsibility on online retailers that sell into the state. "They're holding these people hostage to make a political point." It is without a doubt a high-stakes game, but it seems to resemble chess more than football. Amazon appears to be sacrificing one pawn after another in order to maintain its unfair competitive advantage.

What are the stakes? For Amazon.com, the goal is to continue selling books and other goods as much as 9% cheaper than its competitors by simply not adding sales tax to the transaction. According to the New York Times, the advantage gained from this type of tax avoidance has been a major part of Amazon's business plan since the beginning. According to the Times, Amazon has even admitted as such: "In its last quarterly report, the company told investors in its discussion of risk factors that the imposition of sales-tax collection by more states or Congress could 'decrease our future sales.'"

The stakes for everyone else are just as important. For brick-and-mortar stores (one of which, I confess to owning), the reality is that they cannot compete with companies like Amazon.com as long as their own customers have to shoulder the entire burden of paying state and local sales taxes. The stakes are high for state and local governments as well, since there is a truly staggering amount of revenue lost when online sellers (the biggest of which is Amazon.com) refuse to collect taxes. According to the , a non-profit tax-study group, the loss is in the multi-billions:

We forecast e-commerce sales to rise from $3.0 trillion in 2010 to $4.0 trillion in 2012. The national state and local sales tax loss on these transactions is expected to grow from $8.6 billion in 2010, the first year following the recession, to $11.4 billion in 2012. The losses total $52.1 billion over our six year forecast horizon.

Why Colorado?

Colorado is just the latest battleground in Amazon.com's tactical war to maintain its tax-free sales advantage. The first skirmish was fought in New York in 2009, when the legislature adopted a measure requiring internet sellers with a large number of affiliates in the state - like Amazon - to begin collecting sales taxes. Amazon responded by threatening to cut off its affiliate program in any other state that did the same thing. It followed through in North Carolina by cutting off its affiliates after that state adopted a similar bill. Tax expert Michael Mazerov examined in detail the history of this tax war in a July 23, 2009, article in the journal of The Center on Budget and Policy Priorities.

Why did Amazon.com retaliate in North Carolina and not it New York? One reason, perhaps, is that New York is a much bigger market and Amazon could not afford to lose the business the New York affiliates send its way. But there was probably another reason: California was in the process of enacting a similar law, and Amazon needed boots-on-the-ground to kill that bill. The sacrifice of a few North Carolina affiliates would be a small price to pay if it frightened the affiliates in the biggest state into action. In case they didn't quite get the message from the North Carolina experience, the California affiliates were contacted by Amazon and told they better take action. The tactic worked: Amazon's California affiliates besieged Governor Schwarzenegger's office and convinced him to veto the bill.

Why has Amazon.com now done the same thing in Colorado? It's a year later, and a similar bill is once again heading towards the Governor's desk in California. Presumably, Amazon believes that the cut-off of its Colorado affiliates will have the same galvanizing effect as last time with its affiliates in the sales-rich California market.

An Exercise in Cynicism

The entire thing is an exercise in cynicism. Amazon could easily maintain its sales-associate program in each state and simply add the sales tax to every transaction. In the short term, Amazon.com would probably make money from collecting sales tax throughout the country, because the amount of money it would make on the float each month would more than offset any administrative cost.

But instead, Amazon.com has decided to cut off its sales associates in smaller states with the apparent goal of influencing the political decision-making process in the larger states. It has taken some of its most loyal customers - the Amazon Associates - and used them as pawns. This entire episode shows the lengths to which Amazon.com will go to retain the unfair competitive advantage it gets from skirting the sales-tax system.