Should Amazon Pay Sales Taxes?

NEW YORK ( TheStreet) -- Should Amazon ( AMZN) be forced to pay sales taxes? That's the question being asked as the e-commerce giant threatens to sever ties with affiliates if forced to pay up.

While this has been an ongoing debate, the dispute has recently escalated, as states seek ways to bolster their revenues to close their budget deficits coming out of the recession. One way to do this would be through sales taxes.

In the past, Amazon has been protected by a 1992 Supreme Court ruling (Quill Corporation v. North Dakota) that prohibits a state from forcing a business to collect sales tax unless it has physical stores in the market.

>>Retailers Make Pitch to Amazon Affiliates

But while taxpayers in most states are required to pay the tax directly to the government, few actually do.

>>Click here to take our Amazon poll

Currently, Amazon collects sales tax in five states -- Kansas, Kentucky, New York, North Dakota and Washington -- the only markets where it has stores or offices. But if other local governments have their way, this could soon change.

Several states are seeking to get around these restrictions by passing laws that expand the definition of physical presence.

Last week, Amazon ended its affiliate program in Illinois, after the state signed a law that forces online retailers that work with affiliates in the state to collect sales tax on purchases made by residents.

Affiliates are partner sites that earn commissions by advertising or linking to an online retailer's merchandise.

Amazon has had already terminated affiliate partnerships in Colorado, Rhode Island, Hawaii and North Carolina.

The company also threatened to end relationships with more than 10,000 affiliates in California if the state passes a similar law, and Amazon shuttered its warehouse in Texas after lawmakers sent the retailer a bill for $269 million in unpaid sales tax.

Traditional retailers like Wal-Mart ( WMT), Sears ( SHLD) and Barnes & Noble ( BKS) are lashing out at Amazon, saying it is only fair that the online retailer collects sales tax.

Since these are predominantly brick-and-mortar business that operate physical stores in the states in which they conduct online business, these companies are already collecting sales taxes.

Overall, analysts do not foresee affiliate taxation as having a material impact on online sales. Janney Capital Markets analyst Shawn Milne says affiliates typically account for less than 5% of traffic generation for online retailers.

Amazon terminating these relationships may ultimately be no big loss for the company, but it surely doesn't make for good press.

Of course this issue isn't just relevant to Amazon. Overstock.com ( OSTK) is also going head-to-head with states, recently dumping its affiliate program in Illinois, which will end on May 1.

What do you think? Should Amazon be forced to collect sales taxes? Take our poll and see what TheStreet readers are saying....

Should Amazon be required to collect sales tax in every state in which it does business?

Yes -- It's unfair to locally owned stores if Amazon is exempt from charging sales tax.
No -- I want my Amazon purchases to be as cheap as possible.

--Written by Jeanine Poggi in New York.

>To contact the writer of this article, click here: Jeanine Poggi.

>To follow the writer on Twitter, go to http://twitter.com/jpoggi.

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