Amazon wards off sales tax risk

By Alexandria Sage – Analysis

SAN FRANCISCO (BestGrowthStock) – Amazon.com Inc (AMZN.O: ) is under attack over sales tax, or the lack of it, as states aim to stanch their budget deficits; but the world’s largest online retailer carries little short-term risk and may even gain points from consumers with its populist messages.

Amazon holds the cards for now, say experts, and is willing to pull the plug on an “affiliates” marketing program that drives online traffic to its site and is the basis for recurring state claims that the retailer should collect tax from its shoppers.

The issue is a rallying point for criticism that online retailers have an advantage over their brick-and-mortar rivals in that their customers don’t pay tax. Consumers are supposed to report estimated sales tax from online sales on their state tax returns, but this is frequently ignored.

“Amazon is at the forefront as one of the largest pools of potential tax revenue the states can go after,” said BGC Partners analyst Colin Gillis, who said it could face some political backlash from disgruntled states, but little else.

But even as states vie for their fair share of tax, Amazon may score points with consumers as its plays up its low price image and publicly fights meddling by state authorities.

Most recently, the company sued North Carolina’s department of revenue, claiming its demand for Amazon to turn over names and buying records of customers violated privacy laws.

Amazon has cast itself as the white knight in a Big Brother probe, asserting its legal right to supply “popular and unpopular expressive materials” that are protected from “unnecessary government scrutiny.”

North Carolina has since backed off and offered a more tempered compromise.

Such posturing by Amazon, together with its carefully cultivated image as a low-price leader, will likely keep at bay consumer criticism that Amazon is unfairly benefiting at the expense of state coffers.

“There will not be much backlash,” said Steven Addis of Berkeley-based branding firm Addis Creson. “They’re championing a populist cause, which is lower taxes.”

FIRING AFFILIATES

Currently, a handful of states — including California for the second time — are considering legislation that would require online retailers to collect sales tax.

Such laws are on the books in New York, Rhode Island and North Carolina, after similar efforts in a slew of states last year failed. A decision over Amazon’s appeal of the New York law is expected soon from a New York appeals court.

Lawmakers have argued Amazon has a duty to collect tax because its “affiliates” — independent Web operators which are paid a fee when they drive traffic to Amazon that results in a sale — operate in the state.

Seattle-based Amazon argues it has no standing in those states and its affiliates are mere advertisers. It has pulled the plug on that program in most states where sales tax has been threatened or put into law, rendering moot the issue of its standing.

One advocacy group recently called a boycott against Amazon after the company shuttered its affiliates program, protesting the lost jobs and what it dubbed “corporate greed.”

But those threats, which have gained little traction, aren’t seen as worrisome to the giant online company’s image.

“The world will pretty much give them a pass on this and the affiliates are the collateral damage,” said Addis. “The buyers, all of us, are actually benefiting from this fight, so there is going to be absolutely no backlash.”

Rebecca Madigan, executive director of the Performance Marketing Association, the affiliate marketers’ trade group, said the issue for Amazon comes down to a return on investment.

“They (Amazon) could just basically say, ‘You know what? This is too much trouble; I’m going to give up on affiliate marketing all together.’ That’s our big risk,” Madigan said.

Less than 10 percent of an online retailer’s sales comes from affiliate marketing traffic, analysts say, and only about eight or nine big online retailers use the estimated 200,000 affiliate marketers in the United States, according to Madigan.

For Overstock.com Inc (OSTK.O: ), which similarly sued in New York over the online sales tax and terminated affiliates around the country, the negative effect on its business has been “immaterial,” said President Jonathan Johnson.

He predicted online retailers would continue to shift their affiliate marketing units to states with no online sales tax.

EVENTUAL TAX

Retail experts predict that eventually all online retailers will be forced to collect sales tax, as Amazon currently does in Europe and in New York and a handful of other states.

So if all states eventually passed such laws — and Amazon ran out of states to which to move its affiliates program — the bigger question is whether shoppers would continue to frequent Amazon or any other online store, knowing they’d have to pay tax.

“Buying online is much more about convenience than it is about avoiding tax,” BGC’s Gillis said, adding that any downside would be shared by all online retailers, not just Amazon.

Attempts at the federal level to institute a universal, more streamlined sales tax are mired in political controversy and have thus far fizzled — meaning that the threat of online sales tax appears many years away.

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(Reporting by Alexandria Sage; Editing by Michele Gershberg and Gerald E. McCormick)

Amazon wards off sales tax risk