Last week, Amazon.com terminated all Amazon Associates in North Carolina because of pending legislation that would have required Amazon to collect and pay sales tax on sales to customers in North Carolina on the grounds that Amazon’s relationship with affiliates in North Carolina gave it a presence in the state.

Amazon’s pre-emptive measure sent a clear message: we’re not messing around with states that want to implement tax collection laws that we believe to be unconstitutional.

One of the readers who commented on my post about Amazon’s termination of North Carolina affiliates noted that Amazon had sent her an email warning that she could face the same fate because her state, Rhode Island, was considering similar legislation.

Today, it appears that Amazon has made the first move again: Rhode Island affiliates have been terminated. Rhode Island resident and affiliate marketer Rick Wilson posted Amazon’s termination email on his blog. It states in part:

We are writing from the Amazon Associates Program to notify you that your Associates account has been closed as of June 29, 2009. This is a direct result of the unconstitutional tax collection scheme passed by the Rhode Island General Assembly with a veto-proof majority. As a result, we will no longer pay any referral fees for customers referred to Amazon.com or Endless.com after June 29. We were forced to take this unfortunate action in anticipation of actual enactment because of uncertainties surrounding the legislation’s effective date. The governor could sign the bill — or have his veto overridden — any day now.

The email goes on to point out that “In the event that Rhode Island repeals this tax collection scheme, we would certainly be happy to re-open our Associates program to Rhode Island residents“.

Amazon’s actions are a stern warning to states considering similar legislation, including California.

While decent arguments can be made that some sort of internet tax regime could be appropriate in the US, states rushing to pass hastily-conceived legislation that would force companies like Amazon to deal with a hodgepodge of tax state and local tax laws and rates are learning the hard way that companies would rather risk some loss than go along with their misguided efforts.

While one cannot diminish the value of affiliates in North Carolina and Rhode Island, the decision to terminate these affiliates was probably quite easy for Amazon given that Amazon’s affiliate-base in these states is probably relatively small compared to other states. Strategically, if Amazon gave in to lawmakers in North Carolina and Rhode Island, it would only give lawmakers in larger states like California greater incentive to pass similar legislation. That could have a far greater impact on Amazon.

Thanks to their short-sighted attempts to boost tax revenues, lawmakers in North Carolina and Rhode Island will not only not be receiving sales tax from Amazon, they’ll be losing some revenue in the form of income tax paid by residents who will no longer be cashing checks from Amazon. Now that other states see this, the question is whether they’ll back off or up the stakes.

Photo credit: dps via Flickr.