news-record.com

RALEIGH — Online retailer Amazon.com carried through with threats to end its relationship with online businesses based in North Carolina Friday, raising the stakes in a game of chicken over online sales taxes.

The local businesses, which Amazon calls “affiliates,” refer customers to the retailer through ads on their own Web sites. Typically, the ads recommend specific books or music.

North Carolina lawmakers have proposed applying sales taxes to those transactions, something Amazon says would be unconstitutional. The company won’t specify how many affiliates it has in the state.

That proposal — which fiscal analysts estimate could raise about $13 million — is wrapped up in negotiations between the House and Senate over the state budget. Lawmakers are trying to bridge what they describe as a $4.5 billion gap based on last year’s budget and tax collection estimates for the coming year.

Those negotiations are due to carry on for at least the next week and probably longer. So despite warnings more than a week ago, Amazon’s move came as a surprise to most.

James Barrett , a Winston-Salem technology consultant, said Friday he was angry with both the General Assembly and Amazon. Lawmakers, he said, shouldn’t consider a tax that in his mind violates the commerce clause of the Constitution.

But, he said, the company is behaving badly as well.

“They’re trying to tick off all their associates and get them to call down to Raleigh,” Barrett said. “I think that is pretty tacky. That’s not the way to use people who are referring business to your business.”

Barrett says he only earns a small amount from the ad on his site, www.bitsofws.com. But others have built small business based in large part on the income they derive from referrals.

“My heart bleeds for them, but we’re not the ones putting them out of business,” said Sen. David Hoyle , a Dallas Democrat and lead tax writer in the Senate. “Amazon is doing this.”

Hoyle said that even if the state did nothing, the North Carolina Department of Revenue had plans to start collecting taxes on this kind of “click through” revenue from Amazon.

A revenue official said the department could not comment on what action the state might take with regard to a specific taxpayer.

The fight regarding affiliates has to do with a larger struggle over collecting sales taxes from online merchants. In theory, if a merchant does not collect sales tax on a purchase, the individual is supposed to remit a payment with their income taxes. That rarely happens.

Hoyle and others argue that puts merchants that pay real estate, sales and other taxes based on their physical presence in North Carolina at a disadvantage. Essentially, Amazon is giving North Carolina customers a 6.75 percent break on the price on all items.

North Carolina is taking part in a larger effort known as “streamlining” that is aimed at helping states collect those taxes that they’re missing. The idea is to create standard sales tax rates that national merchants can easily collect and send to states.

“It’s not a question of capability,” said Patty Smith , a spokeswoman for Seattle-based Amazon. “We do not feel we should have to comply with unconstitutional legislation.”

She said Amazon supports the streamlining effort and does pay sales taxes in states where the company has a physical presence, such as Washington. But she argues that earlier lawsuits over mail order catalogues established that if a retailer does not have a physical presence in the state that business does not have to collect sales taxes.

But New York has challenged that idea with a law similar to the one being considered in North Carolina. Smith said that the company has collected New York sales tax while lawsuits over that law work their way through the courts.

In North Carolina’s case, she said, the company was cutting off ties with affiliates to avoid being caught off guard.

“We do appreciate all our associates have done for us over the years,” Smith said. “It’s unfortunate that the state legislature has drafted a bill that we find unconstitutional. We feel we have little choice.”

Contact Mark Binker at (919) 832-5549 or mark.binker@news-record.com