Amazon calls new tax 'unconstitutional,' cuts ties with Minnesota affiliates

Online retailing giant Amazon.com is cutting ties with its small business partners in Minnesota, due to a new state sales tax requirement that kicks in at the end of the month.

Amazon claimed that the new Minnesota tax that it wants to avoid is "unconstitutional," and notified its associates Tuesday that their accounts and contracts will terminate at the end of June.

Carrie Rocha of Maple Grove said the email she received from Amazon was disappointing but not surprising. Rocha earns commissions from Amazon and other big online retailers by driving traffic to their websites from hers, which is called pocketyourdollars.com. Rocha has spent a lot of time at the Minnesota Capitol the past couple of years lobbying unsuccessfully against the tax. She said she knew this day was coming.

"Online retailers who have relationships with an associate or an affiliate like me and do a certain amount of business in the state of Minnesota, they have to collect sales tax," Rocha said. "There's a very easy workaround for these businesses and that's to sever their business relationship with me, basically fire me. They don't then have to collect the sales tax."

With traditional retail businesses calling for a more level playing field, state lawmakers tried to capture at least some of the sales tax revenue currently not being collected from transactions over the Internet. They estimated it would generate about $5 million annually. State Sen. Ann Rest, DFL-New Hope, said the new law simply clarifies the existing sales tax obligations for the Minnesota affiliates of large online retailers.

"There's a very easy workaround for these businesses and that's to sever their business relationship with me, basically fire me."

"We have long -- I mean for years and years and years -- have taken the position that the sales tax was due, and that Amazon was just not compliant. But we finally were able to in this year's tax bill clarify that," Rest said. "Amazon obviously has decided that's not a good business decision for them, so they're pulling out."

Minnesota follows a dozen other states in passing similar laws. State Revenue Commissioner Myron Frans said he was disappointed by Amazon's decision and its impact on small businesses. He said he plans to talk to some of the associates in the coming weeks. Despite the action, Frans stressed that the $5 million revenue projection from the tax still holds.

"We anticipated that Amazon might do this and we made our revenue estimates accordingly to adjust for that probability," Frans said. "The revenue estimate remains in effect for this change."

Amazon declined to comment for this story. In its notification to associates, the company said the action was a direct result of what it claimed is an "unconstitutional" state law. Frans and Rest said they believe the requirement is on solid legal ground. Others are not so sure. State Sen. Julianne Ortman, R-Chanhassen, said she thinks Amazon might have a point.

"There has to be some legal basis or a relationship, connection, or a nexus it's called, with that actor. In this case, Amazon doesn't have a presence here in the state of Minnesota. They don't have operations here. They don't have bricks and mortar here," Ortman said. "We would be telling a company outside of the state of Minnesota that here they now have a requirement to collect a tax on our behalf."

Ortman predicted there will be lawsuits filed over the new state law.

Amazon's message did not mention any legal challenges, but it did say the associate program could be re-opened to Minnesota residents if Congress makes changes in federal law. The company supports passage of what is called the federal Marketplace Fairness Act, which it says would create a simplified framework to resolve interstate sales tax issues.

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