Seattle's biggest online retailers are upping the ante in their game of chicken with cash-hungry states. Today online diamond retailer Blue Nile joined Amazon.com in ending its affiliate program in Rhode Island (both companies have cut off affiliates in North Carolina as well). Affiliates link to retailers like Blue Nile and Amazon for a sales commission, and play a role in driving ecommerce business. But as cash-strapped states across the country look to classify online retailers as physical retailers through their work with local affiliates -- and force them to pay sales tax -- Blue Nile and Amazon are pulling the plug on the affiliates.

Here's the text of Blue Nile's termination email to Rhode Island affiliates, obtained by TechFlash:

We are writing to notify you that we are terminating our relationship with all Rhode Island affiliates, effective immediately. This is a result of the tax collection legislation passed by the Rhode Island state legislature, and expected to become law.
 
Blue Nile regrets the need to take this action. As the U.S. Supreme Court’s 1992 Quill decision makes clear, the proposed bill is unconstitutional as it requires sellers with no physical presence in the state to collect sales tax on sales to buyers in that state.
 
Blue Nile has taken this action in advance of the legislation’s implementation because the effective date is unclear. We have enjoyed working with you, and want to assure you that you will earn commissions on any qualified sales through the time of termination on June 30, 2009.
 
We remain hopeful that this unconstitutional legislation will eventually be repealed, at which point we would be happy to resume working together. Thank you for your participation in the Blue Nile Affiliate Program.

So how much will it hurt Amazon and Blue Nile to end these affiliate programs, particularly if the showdown expands to other states? Larry Dignan at Cnet explores that question, concluding:

Simply put, if Amazon cuts its Associates program in every state, its marketing expenses would fall dramatically and ultimately boost earnings. And Amazon would likely land the sale, anyway. Meanwhile, these small businesses that like Amazon's commissions will be screaming at their state legislators.

Stay tuned -- this battle appears to be far from over.

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