This is beginning to look like a game of Whack-a-mole. As cash-strapped states across the country consider legislation that would force online retailers like Amazon.com to collect sales tax, Amazon is doing its best to snuff out those efforts before they take root. The latest example is California. Amazon sent a letter Monday to Gov. Arnold Schwarzenegger and key California lawmakers (pdf, 2 pages) warning that if tax legislation there passes, Amazon "would have little choice" but to end its relationship with California affiliates.

The California letter follows similar Amazon warnings to Hawaii, North Carolina, Maryland, and Minnesota. Many states are looking to follow the lead of New York, which passed a law establishing that online retailers like Amazon have a physical presence in the state through their relationship with locally based affiliates -- and are thus required to collect sales tax on items shipped to state residents. Affiliates link to Amazon products in exchange for a cut of sales, and are an important part of Amazon's ecommerce model. Amazon has challenged the New York law, so far unsuccessfully.

For states facing budget shortfalls in the recession, the idea of making online retailers collect sales tax has an obvious appeal (many states require sales taxes on online sales, but residents often don’t pay them). For Amazon, which currently collects sales tax in only a handful of states -- mostly where it has a physical presence through offices or warehouses -- the New York-style legislative efforts represent a big threat. They could turn off bargain-hunting shoppers not accustomed to paying sales tax on online orders.

Amazon, in its letter to California, argues that the New York-style tax legislation there is "unconstitutional because it ultimately would require sellers with no physical presence in California to collect sales tax merely on the basis of contracts with California advertisers." The ecommerce giant has shown support for the Streamlined Sales Tax Project, a nearly decade-old campaign to simplify and coordinate sales tax laws across the states.

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