As most of Colorado knows, Amazon suspended its affiliate program in Colorado yesterday.  Monday morning, many of us (myself included) awoke to find the following in our inboxes:

Dear Colorado-based Amazon Associate:

We are writing from the Amazon Associates Program to inform you that the Colorado government recently enacted a law to impose sales tax regulations on online retailers. The regulations are burdensome and no other state has similar rules. The new regulations do not require online retailers to collect sales tax. Instead, they are clearly intended to increase the compliance burden to a point where online retailers will be induced to “voluntarily” collect Colorado sales tax — a course we won’t take.

We and many others strongly opposed this legislation, known as HB 10-1193, but it was enacted anyway. Regrettably, as a result of the new law, we have decided to stop advertising through Associates based in Colorado. We plan to continue to sell to Colorado residents, however, and will advertise through other channels, including through Associates based in other states.

There is a right way for Colorado to pursue its revenue goals, but this new law is a wrong way. As we repeatedly communicated to Colorado legislators, including those who sponsored and supported the new law, we are not opposed to collecting sales tax within a constitutionally-permissible system applied even-handedly. The US Supreme Court has defined what would be constitutional, and if Colorado would repeal the current law or follow the constitutional approach to collection, we would welcome the opportunity to reinstate Colorado-based Associates.

You may express your views of Colorado’s new law to members of the General Assembly and to Governor Ritter , who signed the bill.

Your Associates account has been closed as of March 8, 2010, and we will no longer pay advertising fees for customers you refer to Amazon.com after that date. Please be assured that all qualifying advertising fees earned prior to March 8, 2010, will be processed and paid in accordance with our regular payment schedule. Based on your account closure date of March 8, any final payments will be paid by May 31, 2010.

We have enjoyed working with you and other Colorado-based participants in the Amazon Associates Program, and wish you all the best in your future.

Best Regards,

The Amazon Associates Team

The reaction to this has tended to fall along typically uninformed party lines.  The Democrats tend to accuse Amazon of trying to avoid the new Internet Tax.  The Republicans claim that this is just a natural response, pulling out of a suddenly burdensome situation.  In fact, neither is quite right.

The law, HB10-1193, was one of the Dirty Dozen tax increases, an imposition of the state sales tax on a hitherto exempted category.  Internet sales in fact have been taxed, if the seller has a physical presence in the state.  Therefore, if you buy a washing machine from Sears online, since Sears has stores and warehouses in Colorado, you would have paid sales tax on that purchase.  Companies with no physical presence in the state have been exempted from that sales tax here and in most states, because there was essentially no way to enforce the tax.

The Internet Tax supposedly sought to capture an estimated $5 million in revenue that was being missed, on the theory that affiliates based in Colorado provided a physical presence to the company.  In theory, this was revenue that had migrated from taxable in-store sales to non-taxable Internet sales.  However, this was wrong in both theory and practice, and Democrats in the House who voted for it (including HD-6’s current rep Lois Court) were operating under mistaken assumptions.  First, there’s no way of measuring how many sales were made online that otherwise would have been made in stores, and how many were additional sales of items that would not have been available in state, or were from sales that were only available online.  Secondly, good luck getting Amazon to turn over customer records.

Now, when Rep. Court was confronted with the fact that this tax was uncollectable, that companies out of state couldn’t be forced to comply, and that people might well alter their buying habits to avoid the tax, her reply was a consistent, “find me another $5 million.”  In other words, she voted to pretend to raise $5 million and to make the state look foolish in the process.

Clearly, this proposed tax, whose enforcement would have fallen on the affiliates, would have created a huge administrative nightmare for the thousands of small affiliates in the state, many of whom would have folded up.  It was also predictable under those circumstances that companies like Amazon might have folded up and terminated their affiliate contracts.  But a concerted lobbying effort, led by my friends Marc and Claudia Braunstein, who own ShopAtHome.com, a business based entirely on affiliate relationships, and by the PMA, forced the State Senate to amend the tax so that the responsibility for tracking and paying the tax falls on purchasers now, rather than sellers.   In other states, Rhode Island and North Carolina, that change wasn’t made, and Amazon pulled out.  But it was expected that this would save the affiliate relationships here in the state.

So here’s where both sides are wrong, and where it becomes clear that Amazon has made at least a tactical error here.  Their action is clearly not an attempt to evade paying the sales tax.  The administrative burden of that tax falls on buyers, not Amazon, and if Colorado attempts to force a company based in Washington State to disclose the purchases of their Colorado customers, it’s going to find itself needing a supplemental appropriation to the Attorney General’s office.  In fact, the predictable failure to raise revenue, combined with the black hole of legal expenses, might actually allow this change in tax policy to qualify under TABOR.

But precisely because of that, the action makes no sense to the affiliates.  Without warning, thousands of Amazon’s sales partners found their incomes eliminated, despite their efforts. This looks an awful lot like friendly fire.  These are business partners that the company has alienated and insulted.  These are your allies, Amazon.  What, have you been making a detailed study of the Obama Administration’s approach to Britain?

Now maybe Amazon is trying to get their affiliates to put pressure on the state to repeal the damn thing altogether, and Greg Brophy, chief among the Senators Who Get It, is already talking about that.  But maybe Amazon is really ticked off at its affiliates.  After all, they only lobbied to shift the administrative burden, and onto their customers, at that, rather than to stop the tax altogether.  This is, at least, poor customer relations.  It’s also possible that Amazon sees it as cowardly, since the affiliates were counting on Amazon to foot the legal bill to fight this thing.   Never mind that Amazon could have passed some of this cost along to its Colorado affiliates in the form of reduced referral fees.  But regardless of what Amazon thinks it’s trying to accomplish here, it’s awful PR.

In short, both the Republicans and Democrats are wrong.  Doing this doesn’t make it any easier to fight the tax, and as a result, it’s hard to see why it’s a natural outcome of this otherwise horrible idea for a tax.  But in the end, Amazon’s misfire is going to cost it a lot of the goodwill that it brought into this fight.