Online retailer Amazon has ended all Colorado-based affiliate accounts after a new law passed by the state's legislature would have forced them to collect and pay state sales taxes. The law, HB 10-1193, states that any affiliate marketer making more than $10,000 for a retailer is declared a legal agent, and a state presence, of that company. Rather than be forced to pay the state taxes, Amazon has instead side-stepped the law by closing its doors to all affiliates based in Colorado.

Residents of the state can still buy from Amazon and can even be referred by affiliates in other states, but the company's affiliates in Colorado are out of luck. In a letter to its affiliates announcing the termination of their accounts on Monday, Amazon decried the new Colorado state law and encouraged affiliates to "express their views" to the General Assembly and to Governor Bill Ritter.

"There is a right way for Colorado to pursue its revenue goals, but this new law is a wrong way," Amazon wrote in a letter to it's affiliates. "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."

A court decision in 1992 ruled that online retailers only have to pay state sales taxes to those in which they have a physical presence in, such as with offices or warehouses. Colorado's new law says that affiliates represent a presence in the state, but in reality they are just marketing partners, not part of the company as the law suggests.

Backlash yesterday was largely targeted at the Colorado legislature, and not at Amazon for ending the program. It makes more sense for Amazon to end their affiliate program in Colorado than to be forced to file state taxes, especially since they can still make money from customers in the state. By attempting to collect on taxes from online retailers, Colorado has effectively shot themselves in the foot; Amazon affiliates can no longer make any income which means less income tax for the state to collect. There are other companies through which to run an affiliate account, but why would they want to pay taxes either?

"I should have come out very publicly about this when I first heard about it," writes investor Brad Feld, himself one of Amazon's discontinued Colorado affiliates. "I expect the Internet Affiliate business in Colorado will completely die within the next thirty days (every company that has an affiliate business will turn off all of their Colorado-based affiliates.)"

The Colorado legislature should have foreseen this outcome - it's not the first time Amazon has been forced to shut down affiliate programs. In July of 2009, Amazon closed off their programs in Rhode Island and North Carolina, and has previously sued over a law passed in New York in 2008. The suit, however, was eventually thrown out and Amazon has since been paying taxes for New York affiliates they feel are too valuable to give up.

The decision in Colorado should make entrepreneurs and small business owners participating in similar affiliate programs in any state nervous, especially those in states with large deficits and small consumer markets. California's budget woes and it's large consumer economy could make a bad combination for Amazon who might be unwilling to give up their valuable affiliate program there if a similar law is enacted. The problem for affiliates in smaller states is that Amazon won't think twice about shutting down their program there, as evidenced by Rhode Island and North Carolina.