By GEOFFREY A. FOWLER and ERICA ALINI
Amazon.com Inc. and other e-commerce companies are winning some skirmishes against cash-strapped states that want to force them to collect sales taxes, but their victories may be short-lived.
Several states are contemplating new laws or revisions to existing law that could eventually force online retailers to pony up. North Carolina, for instance, has a two-pronged approach to going after online retailers. If its current efforts to tax online sales fall through, the state's revenue secretary plans to interpret existing laws to require companies that have marketing affiliates collect sales taxes.
State Sen. David Hoyle on Thursday called the effort "a fairness issue." Collecting sales taxes from out-of-state sellers could bring between $150 million and $200 million annually in additional tax revenue, he said. Mr. Hoyle said current law allows the state to force online retailers retroactive sales taxes.
Online retailers have rebuffed efforts to tax their sales in some states. Amazon.com employees in Kentucky prepare Kindle shipments last month.
Texas is also investigating whether Amazon has a presence in the state through a subsidiary that handles distribution. If so, Amazon could be forced to collect future taxes, and potentially pay tax on past sales.
E-commerce companies said they continue to believe they are not required to collect such taxes. "We don't want to shoulder the unconstitutional burden of collection in states where we lack a physical presence," said Patty Smith, a spokeswoman for Seattle-based Amazon. She said the company is "in compliance with all Texas laws governing sales tax collections. Overstock.com Inc. President Jonathan Johnson said the new efforts will be unsuccessful. "The state legislatures don't have the ability to change what the Supreme Court has said," he said. "We will sue any state that tries to unconstitutionally attack our business," Mr. Johnson added.
An effort by some states and retailers to streamline sales tax laws eventually could be used to force e-commerce companies to collect tax in 20 states. Congress has considered bills that would allow states that meet certain uniformity and simplification standards in their tax systems to demand that out-of-state sellers collect sales taxes.
These new battle lines are being drawn just as the dust settles on the latest confrontations. Over the past month, lawmakers in New York, Rhode Island, North Carolina and Hawaii passed legislation that would force e-commerce companies to collect sales tax if they have in-state online-marketing affiliates, people who get a commission from sales via their Web sites or blogs. The states argue that that those affiliates amount to sales agents with a physical presence, while e-commerce companies say they're more akin to advertising channels.
To avoid getting caught by the new laws, Amazon, Overstock, Blue Nile Inc. and others dropped or threatened to drop affiliates in some states.
In response, some states backed down on their plans. On Wednesday, Hawaii governor Linda Lingle vetoed her state's e-commerce tax bill, saying it would have negative consequences for local businesses. Gov. Arnold Schwarzenegger of California, which has contemplated similar legislation, also promised Wednesday that he would veto any such proposals.
There are about 200,000 affiliate marketers in the U.S., tied to about $14 billion in annual revenue either directly or through supporting businesses, according to trade group Performance Marketing Alliance. Affiliates range from large coupon-collecting Web sites to people such as 56-year-old Lydia Walshin in Glocester, Rhode Island, who runs a cooking blog called the Perfect Pantry. Ms. Walshin's site includes links to cookbooks sold on Amazon and other sites, for which she gets a sales commission of as much as $1,000 per year.
"Those pennies really add up as an overall strategy to monetize my blog," said Ms. Walshin. Now that Amazon has ended its business with her, she said she's looking for other revenue streams.
Dropping affiliates doesn't cause significant financial damage to e-commerce companies. Forrester Research analyst Sucharita Mulpuru estimates affiliates drive between 8% and 20% of the sales for e-commerce sites. But many of those buyers would find their way to online retailers anyway.
Many traditional retailers say that not having to collect sales tax gives e-commerce companies an unfair price advantage. Some legislators agree. "I find it disheartening that small businesses have to collect sales taxes and big companies like Amazon and Overstock do not," said Rhode Island state Rep. Steven Costantino.
The idea to use affiliates as a way to force e-commerce companies to collect sales tax came from former New York Gov. Eliot Spitzer, who included it in his 2008/2009 budget. Overstock responded at the time by pulling out of its affiliate business in New York. Amazon kept its affiliate business there, but joined Overstock in challenging the law in court. They lost the case, but are currently appealing it.
The threat of retailers terminating in-state affiliates helped convince states including Maryland, Minnesota and Tennessee to abandon proposals for new online sales tax laws.
Write to Geoffrey A. Fowler at geoffrey.fowler@wsj.com and Erica Alini at Erica.Alini@wsj.com
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