The nation’s largest online retailer threatened Monday to end its advertising relationships with Connecticut businesses if the legislature enacts a new measure to collect sales taxes tied to Internet transactions.

And though did not disclose specific numbers, the head of a California-based marketing association that represents the online giant estimated nearly 2,000 Connecticut businesses – mostly small operations – would be targeted.

“If Connecticut were to enact RB 5481, Amazon and presumably dozens of other out-of-state retailers would simply sever affiliate advertising relationships with Connecticut residents,” Paul Misener, Amazon’s vice president for global public policy, wrote in testimony submitted to the Finance, Revenue and Bonding Committee.

Misener, who did not appear in person at Monday’s committee hearing, added that residents of other states that haven’t enacted similar measures “could still participate in the affiliates’ program and earn referral fees in part on retailers’ sales to Connecticut consumers.”

These sales affiliates, which are the linchpin of legislative attempts here and in other states to collect sales tax revenue due on ever-growing Internet sales, total nearly 200,000 nationwide, and about 2,800 in Connecticut, according to Rebecca Madigan, executive director of the southern California-based Performance Marketing Association.

Of those 2,800 Connecticut affiliates, she estimated that 70 percent are linked to Amazon. Madigan’s organization represents Amazon, other online giants such as Google, Yahoo and eBay, as well as a growing affiliate network.

Misener did not return a telephone call seeking comment Monday afternoon.

Meanwhile, the finance committee also heard Monday from business groups urging them to dump the so-called “Amazon Law” proposal, as well as appeals from municipal leaders and others who argued state government cannot forfeit a revenue stream worth tens or hundreds of millions of dollars per year.

The legislation pending here “would substantially harm the small business I run by reducing a large source of revenue that we rely on to survive,” Thomas M. Caporaso, president of the Clarus Marketing Group of Wethersfield, testified, adding his small, online marketing business employs more than 20 workers, largely through advertising deals with Amazon, and dozens of other retailers. “These 20-plus employees depend on our Internet, and specifically, affiliate success to support their families and put food on the table.”

Most of the affiliates are small businesses with Internet sites that provide a link to an online retailer, and receive a fee when a customer referred from their site makes a purchase.

Tammy Cota, executive director of the Washington, D.C.-based Internet Alliance, said sales generated by affiliate referrals typically represent less than 10 percent of the annual revenue stream for the 21 online retailers she represents. But while the retailers could search for other advertising options to reach Connecticut consumers besides the affiliate system, the affiliates themselves could not adjust so easily to the lost revenue.

“This legislation would not solve the issue of uncollected use taxes on remote sales,” Cota testified. “Rather it would create an unlevel playing field.”

Connecticut, like several other states, is trying to find its way around a 1992 U.S. Supreme Court decision that held a state cannot force businesses to collect sales taxes unless they have a physical presence within that state.

One possible route was mapped out in 2008 when New York enacted a law that said online retailers have a “nexus,” or physical presence, if their New York sales affiliates generate a threshold level of business.

The Connecticut bill sets a nexus test of $2,000 in quarterly sales generated over four consecutive quarters by in-state affiliates.

While the New York law is tied up in a legal challenge brought by Amazon, other states that have enacted similar statutes, including Colorado, North Carolina and Rhode Island, have seen Amazon fire its sales affiliates within their boundaries.

In all, states lose a total of $7 billion a year in sales tax revenue, according to an analysis by the Center on Budget and Policy Priorities, a nonprofit fiscal and public policy group based in Washington, D.C. is one of the nation’s largest online retailer with thousands of affiliates nationwide, the center says.

Connecticut Voices for Children, a New Haven-based public policy and research group, cited University of Tennessee research that estimates Connecticut could lose nearly $50 million in 2010 from unpaid sales taxes from Internet transactions. Some state officials have said they believe given the rapid growth in online sales, the loss could exceed $100 million.

Yale Law School student Jeffrey M. Tebbs, who testified Monday on behalf of Connecticut Voices, said Amazon’s policy of dumping sales affiliates can’t continue if enough states adopt laws similar to New York’s. He noted that Amazon fired all its affiliates in some states, but not in New York – one of the largest consumer markets – opting instead only for the legal challenge.

“Connecticut should not be dissuaded from enacting legislation that will level the playing field for in-state businesses, modernize the sales tax and potentially raise significant revenue for the state,” Tebbs said.

The Connecticut Conference of Municipalities also testified in favor of the legislation, arguing the added revenues it would raise could be used to supplement shrinking aid to cities and towns.

Both Rep. Cameron C. Staples, D-New Haven, the House chairman of the finance committee, and Rep. Vincent J. Candelora of North Branford, ranking House Republican on the panel, said state government is trying to walk a fine line. It can’t ignore a major portion of its sales tax stream that has moved online, but officials don’t want to harm businesses amid a slumping economy.

Connecticut residents are required by law to pay the sales tax on goods purchased tax-free either out-of-state or online. Those obligations, known as the “use tax,” are supposed to be reported on annual state income tax returns.

But officials concede many residents do not pay the use tax. The $13.4 million in use tax paid last year by Connecticut income tax filers represented less than one-half of 1 percent of all sales tax revenue.

Department of Revenue Services Commission Richard Nicholson testified on several tax-related bills Monday but said nothing before the committee regarding the so-called “Amazon Law.”

“There are really mixed messages out there about how successful this has been in other states,” Nicholson said afterward.  “I think some states regret that they’ve adopted those laws, but we still have a problem,” he said. “It really is a double-edged sword.”

The state’s chief business lobbying entity, the Connecticut Business and Industry Association, also has taken no position on the bill.

Keith has spent most of his 31 years as a reporter specializing in state government finances, analyzing such topics as income tax equity, waste in government and the complex funding systems behind Connecticut’s transportation and social services networks. He has been the state finances reporter at CT Mirror since it launched in 2010. Prior to joining CT Mirror Keith was State Capitol bureau chief for The Journal Inquirer of Manchester, a reporter for the Day of New London, and a former contributing writer to The New York Times. Keith is a graduate of and a former journalism instructor at the University of Connecticut.

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