Illinois governor Pat Quinn is considering whether to sign into law a tax bill that includes a new tax on online retailers, the so-called Amazon Tax.  Until now, online transactions are not taxed in states where the retailer has no physical presence (with a few exceptions.)  The new measure would end this in Illinois, treating Amazon as an Illinois retailer so long as one of its online affiliates is based in the state.  (Every state has thousands of online affiliates.)

Amazon is responding by playing chicken.  From Presh Talwalker:

So Amazon is fighting back at Illinois with a threat. Amazon has emailed its commissioned affiliates the following message:

We regret to inform you that the Illinois state legislature has passed anunconstitutional tax collection scheme that, if signed by Governor Quinn, would leave Amazon.com little choice but to end its relationships with Illinois-based Associates. [emphasis mine]

The following logic seems to explain the motive. If Amazon ends its affiliate relationships in Illinois, then it would have no physical presence in the state, and hence it would get around the bill.

The email levies harsh criticism at Illinois and is meant to garner sympathy. In reality, the move is calculated and strategic.

Amazon is threatening all affiliates on purpose – even though it doesn’t have to. Here is an interesting tidbit the Chicago Tribune reported:

The bill applies only to affiliates that have at least $10,000 a year in revenue. But if large retailers, such as Amazon, cut off all affiliates in Illinois, it would end commission streams to small Web sites, such as bloggers, who might sell Amazon goods at their sites. Amazon could not be reached for comment.

Amazon is playing a classic retaliatory strategy. If Illinois wants to pass this law, then it will do everything to hurt the state and even otherwise innocent and small-time bloggers, who might decide its time to complain to Gov. Pat Quinn.

There’s more in Presh’s article here. (Amazon seems to understand reputation building because it carried through with its threat in Colorado when that state passed a similar measure.)

My view is that the threat is credible even ignoring reputation-building.  The lost revenue from sales tax would dwarf the losses from cutting off affiliates.