Texas Drags Affiliates Into $269 Million Amazon Fight

What happens when two giants go to war? Things get messy for people caught in the middle. The most recent shots traded by Amazon and Texas in their ongoing sales tax battle have put affiliate marketers in the cross hairs. On Tuesday, February 15, the Texas State Legislature introduced a New York-style affiliate bill, HB 1317. A direct challenge to Amazon’s decision to pull distribution centers out of Texas, HB 1317, if passed, goes into effect September 1, 2011.

The First Shot

Last fall, Texas lined up with other states like New York, Rhode Island, North Carolina, Colorado, and Illinois, declaring that Amazon owed back sales taxes to the tune of $269 million. Texas claims this amount represents unpaid taxes plus interest from December 2005 to December 2009. Amazon countered the move by taking a very public stance against the Texas claim in its SEC filing:

We believe that the State of Texas did not provide a sufficient basis for its assessment and that the assessment is without merit. Depending on the amount and the timing, an unfavorable resolution of this matter could materially affect our business, results of operations, financial position, or cash flows. We intend to vigorously defend ourselves in this matter.

Amazon followed up its SEC statement by filing suit against Texas in early 2011, demanding that Texas “produce an audit on which the state bases its demand for $269 million in uncollected sales taxes.” Amazon’s suit, citing the state’s Public Information Act, contends that repeated requests for the audit results to the Texas comptroller’s office in September and October were ignored. Texas, relying on the opinion of its attorney general, countered that the audit results are protected by attorney-client privilege.

So why does Texas believe it has a legitimate claim? Amazon’s distribution center is in Irving, Texas. However, Amazon believes it’s in the clear because the distribution center is owned by a subsidiary technically based in Kentucky, Amazon.com KYDC LLC. From Amazon’s point of view it doesn’t have what is referred to as nexus, or a connection, to the state of Texas.

Strengthening Their Defense

To counter future efforts by Texas to claim sales tax, Amazon announced February 10 that it planned to close the Irving distribution center. This closure also meant the end to expansion plans that would add 1,000 new jobs to the Texas economy. In an emailed statement announcing the decision, Amazon noted that “despite much hard work and the support of other Texas officials, we’ve been unable to come to a resolution with the Texas Comptroller’s office.” The Irving center will close in April 2011.

Getting Even

Still unwilling to admit defeat, Texas introduced HB 1317. Similar in intent to the New York affiliate bill, HB 1317 makes another attempt to establish Amazon as a legal presence in Texas and thus require that it collect and submit state sales tax. At its core, HB 1317 says that sales tax applies when a retailer enters into an agreement with a Texas resident that results in commissions or other considerations related to that resident’s referrals, “including [referrals from] a link on an Internet website,” language aimed at Amazon and other online retailers.

HB 1317 also stipulates that gross sales receipts for referred state residents during the previous four quarters must reach $10,000. With quarterly revenues in the billions, it’s clear that Amazon will need to pay sales tax if the bill passes AND they maintain their Texas affiliate program. However, Amazon may have the Constitution on its side.

In Quill Corp. v. North Dakota, the Supreme Court addressed a similar issue in 1992 regarding what constituted a physical presence in the state and the requirement to collect and pay sales tax. The Supreme Court found, in this instance, that a company must be physically present in a state to require that it pay sales tax. The presence of customers alone in a given state does not constitute a physical presence.

Caught in the Middle

Once again, retail affiliates are caught between the companies they refer to and the states where they reside. Given budget shortages and no more federal dollars to close the gap, Texas believes collecting additional sales tax will make a significant difference. But what happens when the result is lost jobs and decreased personal income? Can state budgets afford to take on more unemployed workers?

Amazon and other retailers with affiliate programs have left states completely when bills like HB 1317 become law, making the bill moot with no sales tax collected as in the case of Rhode Island. It’s worth noting that:

The revenue at stake from uncollected online and mail-order purchases is significant, though not game-changing. In April, researchers at the University of Tennessee estimated Rhode Island’s government would forego a total of $132.7 million in sales tax revenue from 2007 through 2012. The average annual loss is equal to 2.5 percent of the state’s total sales tax collections in 2007.

The main result from this particular battle? No sales tax and lost income to Rhode Island residents.

What Comes Next

Texas isn’t alone in its efforts to cast the sales tax net far and wide. As other states grapple with budget shortfalls and increased demand, online retailers will continue to be targets for sales tax initiatives. In the meantime, if you’re a Texas affiliate marketer, you can join with your peers at Google’s PMA Texas Advertising Group to learn more about what you can do to support efforts to oppose HB 1317.

About Britt Raybould

Britt Raybould has a passion for telling stories and she specializes in helping companies figure out how to tell their own stories. Through her firm, Write Bold, she shows companies how storytelling can define them, both to their customers and within their industry. When she remembers to, Britt blogs on her personal sites at bold-words.com and brittraybould.com. You can find Britt on Twitter @britter.

Website: http://www.writebold.com

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