The biggest online retailer and the biggest state in the US are set to go toe to toe in a bare knuckle no holds barred fight over sales tax on online purchases. For the past 16 years Amazon has been able to physically operate out of Seattle, WA. Meaning the online retailer has to collect sales tax from Washington state customers while being able to sell to the large market of California with out having to collect customer sales tax.

A 1992 Supreme Court decision stated that out of state retailers need not collect sales tax unless it had a physical presence in the state they were selling to. Taking advantage of such a tax loophole has allowed Amazon to become the largest online retailer in the world with over

$34 billion a year in revenue. Some charge this comes at the expense of brick and mortar businesses. But with an $11 billion budget deficit, California Governor Jerry Brown and state legislators are now demanding what they feel is owed to the state. Last month they signed in

effect a law that forces online retailers to collect sales tax if they have any physical presence in California. Estimates suggest this tax will generate around $200 million a year for the state.

The recent law has forced Amazon to let go over 10,000 California based affiliate merchants. These affiliate businesses (most of which are online) make their living by taking in commission on customer orders made via their own websites, but fulfilled by Amazon. This in turn caused a

major uproar throughout Silicon Valley and across the state technology sector. Amazon in turn upped the ante by proposing a ballot referendum to over turn the law.

The California government however does have allies in their fight against Amazon which include traditional large scale retailers like Wal-Mart as well as small local mom and pop type businesses.These "other" retailers have long complained about the unfair price advantage Amazon has due to not collecting sales tax and the disruptive effects is has had on local hiring.

Though the fight has just begun, so far it looks neither side is going to back down. Some suggest this fight may find its way to the US Supreme Court and perhaps set a new precedence for online retailing and the subsequent tax laws around it.

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