Amazon.com is retaliating against a newly minted Colorado sales tax law. The measure, recently signed by Colorado Gov. Bill Ritter, requires online retailers like Amazon to inform Colorado residents how much they owe in sales tax on web purchases and provide a summary of people's web purchases to the state.

Amazon is responding by cutting off its Colorado affiliates — businesses that link to Amazon products and receive a fee on any resulting sales. It's a sign that Amazon will continue to play hardball with states that try to tap the company for sales tax collection.

[Updated with response from Colorado Gov. Bill Ritter, state Department of Revenue, and Colorado affiliate.]

Amazon's response is surprising because Colorado lawmakers tried to protect Amazon affiliates in crafting the legislation. They originally drafted a bill along the lines of what other states have attempted, defining Amazon as a retailer with a physical "nexus" based on its ties to local affiliate websites (a physical "nexus" requires Amazon to collect sales tax).

But affiliates in Colorado — pointing to Amazon's threats to close down affiliate programs in states that enact such "nexus" legislation — created an uproar over the early version of the bill, and Colorado lawmakers dropped the affiliate language. The final version of the bill requires Amazon to tell people what they owe in sales tax rather than collecting it outright.

Amazon, in its letter to Colorado affiliates, indicated it will keep selling in the state. The company did not say whether it would tell Colorado buyers what they owe in sales tax or provide that information to the state, as the new law requires.

This is the first we've heard from Amazon this year on the sales tax issue. The online retail giant only collects sales tax in a handful of states — putting it into conflict with states that are grappling with budget crises and searching for new sources of revenue.

Update: Mark Couch, a spokesman for the Colorado Department of Revenue, said, "We think it's unfortunate that they (Amazon) are discontinuing their relationship with affiliates in Colorado because this law has nothing to do with affiliates in Colorado."

Asked whether Amazon will have to tell Colorado residents what they owe in sales tax on each web purchase, as is outlined in the law, Couch said, "We expect that any company doing business in the state of Colorado to comply with the law."

Couch said that under the new law, Amazon is required to begin informing purchasers of their sales tax obligations by May 1 or start paying a $5 per invoice penalty.

Update: Here's a similar response from Gov. Ritter, via the Wall Street Journal:

Amazon has taken a disappointing – and completely unjustified – step of ending its relationship with associates. While Amazon is blaming a new state law for its action, the fact is that Amazon is simply trying to avoid compliance with Colorado law and is unfairly punishing Colorado businesses in the process.

Update: Marc Braunstein, CEO of ShopAtHome.com, a Colorado-based online shopping portal and Amazon affiliate, said he's "puzzled" by Amazon's actions.

"It doesn't change Amazon's obligations in any way, shape or form," Braunstein said. "I can understand Amazon's frustration, but I don't believe that it served anybody any good to terminate affiliate relationships."

"Affiliates worked hard to build Amazon's business in Colorado," he said, adding of Amazon's action: "All it does is hurt thousands of Colorado affiliates for no reason, to no effect. It's disappointing."

Here's the full text of the Amazon letter to Colorado affiliates below. The company has not yet provided any additional comment.

Dear Colorado-based Amazon Associate:

We are writing from the Amazon Associates Program to inform you that the Colorado government recently enacted a law to impose sales tax regulations on online retailers. The regulations are burdensome and no other state has similar rules. The new regulations do not require online retailers to collect sales tax. Instead, they are clearly intended to increase the compliance burden to a point where online retailers will be induced to "voluntarily" collect Colorado sales tax -- a course we won't take.

We and many others strongly opposed this legislation, known as HB 10-1193, but it was enacted anyway. Regrettably, as a result of the new law, we have decided to stop advertising through Associates based in Colorado. We plan to continue to sell to Colorado residents, however, and will advertise through other channels, including through Associates based in other states.

There is a right way for Colorado to pursue its revenue goals, but this new law is a wrong way. As we repeatedly communicated to Colorado legislators, including those who sponsored and supported the new law, we are not opposed to collecting sales tax within a constitutionally-permissible system applied even-handedly. The US Supreme Court has defined what would be constitutional, and if Colorado would repeal the current law or follow the constitutional approach to collection, we would welcome the opportunity to reinstate Colorado-based Associates.

You may express your views of Colorado's new law to members of the General Assembly and to Governor Ritter, who signed the bill.

Your Associates account has been closed as of March 8, 2010, and we will no longer pay advertising fees for customers you refer to Amazon.com after that date. Please be assured that all qualifying advertising fees earned prior to March 8, 2010, will be processed and paid in accordance with our regular payment schedule. Based on your account closure date of March 8, any final payments will be paid by May 31, 2010.

We have enjoyed working with you and other Colorado-based participants in the Amazon Associates Program, and wish you all the best in your future.

Best Regards,

The Amazon Associates Team

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