California tells online retailers to start collecting sales taxes from customers
Beginning Friday, Amazon.com and other large out-of-state retailers will be required to collect sales taxes on purchases that their California customers make online.
Workers push carts full of merchandise at the Amazon.com Phoenix Fulfillment Center in 2010. (Joshua Lott, Bloomberg / June 30, 2011)
Beginning Friday, a new state law will require large out-of-state retailers to collect sales taxes on purchases that their California customers make on the Internet — a prospect eased only slightly by a 1-percentage-point drop in the tax that also takes effect at the same time.
Getting the taxes, which consumers typically don't pay to the state if online merchants don't charge them, is "a common-sense idea," said Gov. Jerry Brown, who signed the legislation into law Wednesday.
The new tax collection requirement — part of budget-related legislation — is expected to raise an estimated $317 million a year in new state and local government revenue.
But those taxes may come with a price. Amazon and online retailer Overstock.com Inc. told thousands of California Internet marketing affiliates that they will stop paying commissions for referrals of so-called click-through customers.
That's because the new requirement applies only to online sellers based out of state that have some connection to California, such as workers, warehouses or offices here.
Both Amazon in Seattle and Overstock in Salt Lake City have told affiliates that they would have to move to another state if they wanted to continue earning commissions for referring customers.
"We oppose this bill because it is unconstitutional and counterproductive," Amazon wrote its California business partners Wednesday. Amazon has not indicated what further actions it might take to challenge the California law.
Many of about 25,000 affiliates in California, especially larger ones with dozens of employees, are likely to leave the state, said Rebecca Madigan, executive director of trade group Performance Marketing Assn. The affiliates combined paid $152 million in state income taxes last year, she pointed out.
"We have to consider it," said Loren Bendele, chief executive of Savings.com, a West Los Angeles website that links viewers to hundreds of money-saving deals. "It does not look good for our business."
The larger bite from buyers' pocketbooks will be eased only a bit because California's basic sales tax rate also will drop to 7.75% on Friday when a 2-year-old temporary increase expires. The basic rate in the city of Los Angeles falls back to 8.75%.
Brown's signature on the budget bills is aimed at closing a loophole that freed Amazon and other out-of-state retailers from collecting sales taxes for California.
Not collecting sales taxes gave Internet retailers a competitive price advantage over California's small businesses such as independent booksellers and big-box retailers with a presence in the state, including Barnes & Noble Inc., Wal-Mart Stores Inc., Best Buy Co. and Target Corp.
"You can't give one segment of retail a 10% discount every day. It's just not fair," said Bill Dombrowski, president of the California Retailers Assn., a major player in a coalition of large and small stores supporting the legislation.
California's new requirement will generate badly needed state revenue and send a signal to Congress that "we want to see a national solution" to the issue of taxing Internet sales, Dombrowski said.
California is the seventh and largest state in the country to pass a law to collect taxes on out-of-state Internet sales. Illinois, Arkansas and Connecticut acted earlier this year, North Carolina and Rhode Island in 2009 and New York in 2008. Amazon sued to overturn the New York law and lost in the lower courts. The company is paying sales taxes into an escrow account pending an appeal.
Other states currently are considering similar sales tax collection bills.
California's new law was drafted to circumvent a 1992 U.S. Supreme Court ruling that sellers can't be forced to collect sales taxes unless they have a physical presence in the state.
The new statute would establish that presence in two ways: when sellers pay commissions to other Internet sites in California, known as affiliates, that refer buyers; and when sellers have a related company operating in the state.
Amazon has thousands of such affiliates in California. It also has related business operations that include Lab126 Inc. in Cupertino, which develops Kindle electronic book readers, and a Studio City office for its Internet Movie Database unit.
One affiliate, Ken Rockwell of San Diego, the owner of a 12-year-old photography website, said he planned to move out of state.
"Will it be Las Vegas or Scottsdale or Ensenada?" he said. "It's a question of where, not if."
Amazon ends deal with 25,000 California websites
Gov. Jerry Brown has signed into law California's tax on Internet sales through affiliate advertising which will immediately cut small-business website revenue 20% to 30%, experts say.The bill, AB 28X, takes effect immediately. The state Board of Equalization says the tax will raise $200 million a year, but critics claim it will raise nothing because online retailers will end their affiliate programs rather than collect the tax.
Amazon has already emailed its termination of its affiliate advertising program with 25,000 websites. The letter says, in part:
(The bill) specifically imposes the collection of taxes from consumers on sales by online retailers - including but not limited to those referred by California-based marketing affiliates like you - even if those retailers have no physical presence in the state.
We oppose this bill because it is unconstitutional and counterproductive. It is supported by big-box retailers, most of which are based outside California, that seek to harm the affiliate advertising programs of their competitors. Similar legislation in other states has led to job and income losses, and little, if any, new tax revenue. We deeply regret that we must take this action.
(Full disclosure: I have a personal website that has been an Amazon affiliate. It made $2 last quarter. That is not 30% of my income.)
Almost all the California Amazon affiliates have fewer than 75 employees and a large percentage have no employees, according to Rebecca Madigan, executive director of the Performance Marketing Association, a Camarillo-based nationwide trade association.
"This law won't impact Amazon that much but it is a crisis for website owners who make revenue by placing ads on their websites for thousands of online retailers," Madigan said. "Most of them don't have a physical presence in California."
California Retailers Association stated: "We thank Governor Jerry Brown and the leaders in the California State Legislature who have demonstrated their leadership and commitment to California businesses by passing and signing e-fairness into law. Small and large businesses across the state have been held at a major disadvantage by the current law that out-of-state online companies like Amazon.com and Overstock.com have exploited for years. This has cost us jobs and revenues."
The U.S. Supreme Court in 1992 ruled that states cannot tax businesses that aren't physically within their boundaries. Such taxes would regulate interstate commerce, which is a federal government prerogative.
However, New York in 2008 passed a law to require companies with online affiliate advertising programs to collect sales tax for sales through those affiliates based in New York. Since then Rhode Island, North Carolina, Illinois, Arkansas and Connecticut passed similar laws.
Amazon is suing New York over the law, and the Performance Marketing Association is suing Illinois.
Amazon affiliate Keith Posehn, owner of zorz.com in San Diego, said he had affiliate advertising agreements with more than 70 companies and these programs were 35% of his company revenue before the California legislature passed a similar bill last year. Then-Governor Schwarzenegger vetoed that bill.
"We got 70 termination letters in one night before he vetoed it," Posehn said. After that, he started changing his business away from affiliate advertising and has started a new mobile application company.
"I have pitched investors and several question the wisdom of staying in California," Posehn said. "Some venture capitalists are very keen on placing startups outside California because start-up costs are less."
However, another Amazon affiliate, Glenn Richards, an independent recording artist in Orange County (MightyFleissRadio.com), is angry with Amazon and its head Jeff Bezos.
"I think that Amazon.com's decision to throw their affiliates, (including myself) under the bus is a national disgrace," Richards said. "Jeff Bezos should be ashamed of his conduct. His bully boy practice and tactics of extinguishing small business in California should be (condemned). Small business has no power...and no hope to confront Internet giants like Amazon.com."Board of Equalization Member George Runner blasted Brown for signing the law. "Even as Governor Jerry Brown lifted his pen to sign this legislation, thousands of affiliates across California were losing their jobs. The so-called 'Amazon tax' is truly a lose-lose proposition for California. Not only won't we see the promised revenues, we'll actually lose income tax revenue as affiliates move to other states."