As revenue-hungry states eye Internet retailers as possible sources of new taxes, http://www.Amazon.com Inc. is firing back.

Seattle-based Amazon yesterday cut ties with Hawai'i Web sites that refer customers to the online retailer because the state Legislature has passed a law to collect sales taxes on these transactions.

The action follows a similar move by Amazon in Rhode Island and in North Carolina, both states that have passed legislation allowing Internet sales to be taxed.

Amazon spokeswoman Patty Smith said said the Seattle-based online retailer sent letters to its Hawai'i associates via e-mail informing them that their accounts with the online retailer had been closed.

At issue is the company's "Associates Program," which lets thousands of small businesses earn money by posting ads for Amazon and its products on their Web sites. Amazon pays the third-party Web site owner a referral fee of up to 15 percent on sales if a consumer clicks through and buys something.

The use of such marketing associates is one of several ways Amazon drives visitors to its Web site.

In its Hawai'i letter, Amazon said it would reconsider its decision if Gov. Linda Lingle vetoed the legislation and the veto was not overridden.

Late yesterday, Gov. Linda Lingle included the bill on her "potential veto list." In a two-sentence explanation, Lingle said the bill "places Hawai'i companies, particularly those involved in on-line website development that make customer referrals to out-of-state businesses, at a competitive disadvantage to Mainland and international firms by attempting to tax the activities of these out-of-state businesses." Lingle also said the bill violates the state Constitution.

In its letter to affiliates, Amazon noted that Lingle has until July 15 to veto the bill but said that its decision will stay in place until the issue is fully resolved.

"In the event Hawai'i's governor vetoes this tax collection scheme, and that veto is not overriden, or in the event the law is eventually repealed, we certainly would be happy to reopen our associates program to Hawai'i residents," Amazon said in its letter.

States can levy sales taxes on Internet commerce only when the Web company has a "physical presence" in the state, such as corporate offices, stores or warehouses.

Seattle-based Amazon, for instance, must charge sales taxes on purchases made on the Internet by Washington state residents. But Amazon customers in nearly every other state don't have to pay sales taxes when they buy from the site.

Now, several states are arguing that these third-party advertising contracts at Amazon and other Internet retailers constitute a "physical presence" and are looking to those companies to charge sales taxes on purchases.

"We feel that the way the state legislatures are going about this is inappropriate," said Patty Smith, an Amazon spokeswoman.

"It places an unconstitutional burden on interstate commerce for a state to require a seller without a physical presence in that state to collect sales tax."

Similar legislation is awaiting action in California, prompting Amazon to send a letter to Gov. Arnold Schwarzenegger last week saying it opposed the move.

Supporters of the legislation say the status quo gives out-of-state retailers an advantage over local merchants and argue that the companies' advertising affiliates clearly indicate a connection between the retailers and the states.

"What the affiliate marketing programs are, are people who are under contract through Amazon who are being paid on commission for referring sales to Amazon," said Lenny Goldberg, executive director at the California Tax Reform Association in Sacramento, which supports requiring retailers to charge sales taxes. "That's drop-dead nexus."

Opponents argue that collecting sales taxes would be both burdensome and costly for Internet retailers; for consumers, it would raise the cost of their purchases.

By canceling the programs, thousands of individuals who rely on commission fees would be affected.

Fred Nicely, tax counsel with the Council on State Taxation in Washington, called the states' efforts to tax shoppers based on affiliate programs "constitutionally suspect."

"This is not door-to-door sales, where someone is knocking on your door, showing you the goods, demonstrating the goods," he said.

"This is passive advertising, which the U.S. Supreme Court has said is not enough of a presence in the state to require a remote seller to have to collect a state sales tax."