Financial News

Attempts by cash-strapped US states to collect tax revenues from sales in cyberspace were this week met by a defiant response from leading online retailers, including Amazon.

As they wrestle with multi-billion dollar deficits, several states including California and Connecticut are considering steps to end the legal exemption of out-of-state online sellers from potentially millions of dollars of state sales taxes.

Traditional retailers that run websites, such as Wal-Mart and Best Buy (NYSE: BBY - news) , already collect sales tax on their online shipments. But existing US law only requires retailers with a local presence in a state to collect the tax, because of the complexity of the state and local sales tax systems.

Some states are now modelling bills on a recent New York state law that extended the definition of a local presence to include local "advertising affiliate" websites that connect customers to out-of-state online retailers in return for a small commission.

Amazon now collects sales tax on shipments to New York, as it does in four other states where it has a physical presence including its headquarters and distribution centres. But both it and Overstock.com, a rival discount seller, are challenging the New York law in the courts, arguing that it breaches inter-state commerce laws.

Amazon this week responded to similar moves by legislators in North Carolina, Rhode Island and Hawaii by ending its relationship with local affiliate sites to retain its exempt status.

Overstock.com, an online retailer, and Blue Nile (NASDAQ: NILE - news) , the online jewellery seller, have similarly cut off affiliates in those three states.

Overstock cut off its 3,400 affiliates in New York state last year and filed a parallel law suit to Amazon's against the move. It has also now cut off affiliates in California.

Patrick Byrne, chief executive of Overstock, said in a statement that the tax legislation was "counterproductive and likely unconstitutional".

In California, supporters of the move include state retailing groups, who argue their online competitors have an unfair advantage.

Congress is also considering a "Main Street Fairness Act" aimed at extending sales tax collection to online sales.

Patty Smith, an Amazon spokeswoman, said the company had no objections to collecting sales tax when required by law, and supported the tax simplification initiative.