The Affiliate “Big One” Hits: California Passes Catastrophic Nexus Tax
An earthquake of a different sort hit California this week when Governor Jerry Brown and the state’s Democratic lawmakers struck a budget deal that included passage of its “Amazon tax.” Despite warnings from Amazon.com, Overstock.com, and other affiliate networks, plus direct appeals from affiliates desperate to protect their livelihood, California appears headed down the same path as New York,Â Colorado, and Illinois,
To get around 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 California law requires the collection of sales tax when:
1) companies (like Amazon) pay commissions to site owners in California that refer buyers
2) a company operates a facility in the state
Proponents of the bill estimate that establishing nexus for online retailers in California via affiliates will generate $200 million per year. However, that number assumes the affiliates currently based in California will 1) stay in California; and 2) still have access to affiliate networks to be taxed. Amazon and Overstock haven’t made empty threats. When they say they’ll leave if a state passes a nexus tax, they leave. Last May, Jeff Bezos reiterated Amazon’s intent to fight against such laws in comments at the ShopSmart Shopping Summit: “We will continue to drop states who pass those affiliate laws, from the affiliate program.”
Upon its passage, Amazon sent a letter to its affiliates notifying them of the possibility that it will close down its California affiliate network. It reads, in part:
For well over a decade, the Amazon Associates Program has worked with thousands of California residents. Unfortunately, a potential new law that may be signed by Governor Brown compels us to terminate this program for California-based participants. It specifically imposes the collection of taxes from consumers on sales by online retailers â€“ including but not limited to those referred by California-based marketing affiliates like you â€“ 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.
As a result, we will terminate contracts with all California residents that are participants in the Amazon Associates Program as of the date (if any) that the California law becomes effective. We will send a follow-up notice to you confirming the termination date if the California law is enacted. In the event that the California law does not become effective before September 30, 2011, we withdraw this notice. As of the termination date, California residents will no longer receive advertising fees for sales referred to Amazon.com, Endless.com, MYHABIT.COM or SmallParts.com. Please be assured that all qualifying advertising fees earned on or before the termination date will be processed and paid in full in accordance with the regular payment schedule.
Overstock announced Wednesday that it will also sever affiliate relationships with California residents.
As I noted in an earlier post, California’s estimated 25,000 affiliates (approximately 10,000 are associated with Amazon) generate $124 million in income tax annually. So with the stroke of pen, Governor Brown puts at risk $124 million in state revenues with no guarantee that anything close to an additional $200 million will be added to the state’s coffers.
WhatÂ happens next? Â California affiliates still have the option to connect with brick-and-mortar retailers (who already collect sales tax because of their physical presence) and establish relationships with the likes of Walmart and Sears. A few months back, Barnes & Noble reached out to spurned affiliates, specifically positioning themselves as an alternative to Amazon and other Â affiliate networks that pull out of states due to tax issues.
Writing at the San Francisco Business Times, Sarah Duxbury captures perfectly what I suspect many affiliates are feeling right now:
“I am thinking about the here and now, and for now I canâ€™t help but wonder how long Amazon will stick with its current zero-tolerance policy and its practice of political lobbying by sticking it to the little guy. After all, several states have already stood up to Amazon, and California is itself amazonian in its population, its affluence, and also in its number of affiliate marketers and Amazon Associates.”
Perhaps California becomes the catalyst for fixing this issue at the national level.