The deal involves Amazon dropping a referendum campaign to overturn a new California law that requires Internet retailers to collect sales tax if they have affiliates and subsidiaries in the state. In return, tax collection will be delayed for one year.

 

Amazon has argued that it must only collect state sales tax in states where it has a physical presence. Since it is based in Seattle, it collects taxes in Washington, for example. California's law, which is similar to others in New York and North Carolina, says the affiliates fit the definition of a physical presence or "nexus."

 

Affiliates are typically small businesses, such as a book review website that includes a link to Amazon, which provides a commission to the affiliate.

 

Amazon has not only ended affiliate relationships around the country and fought the battle in court to avoid taxes, but it spent more than $5 million on its referendum campaign, according to KUOW radio.

 

Affiliates have been hit hard, Rebecca Madigan told CalWatchdog.com. "We just completed a survey that found 35 percent of 25,000 affiliate businesses lost more than half their business," said Madigan, who is director of the Performance Marketing Association, a group of affiliates. "And 32 percent have moved out of California, or are planning on it. This is far greater devastation than we predicted."

 

A blogger on savings.com posted a "Dear John" letter to the state, saying "…we're no longer a good match for each other." It went on, "Ever since you and your new BFF—the Affiliate Nexus Tax—started hanging out, people just don't want to do as much business with us anymore." Amazon, Overstock, and others "have decided that it's not working with us (or 25,000 other California-based businesses) anymore."

 

Amazon has supported a uniform interstate sales tax law rather than the patchwork of laws enacted by each state. The deal gives Amazon a year to lobby Congress to act on the issue. If no federal law is enacted by July, Amazon will start collecting sales tax in California in September 2012.

 

An editorial in the San Jose Mercury News that supports the compromise, even though the writer said it "smells bad," concludes, "Amazon's strategy has been understandable. What business wouldn't want a nearly 10 percent price advantage over competitors? But it just wasn't right. Not here, and not anywhere in America. California is standing up. Now it's Congress' turn."