Amazon to Yank Ad Affiliates Cut California Tax Revenue by Half Over Law

by editor

The state of California wants to collect more than $1 billion a year from Amazon and other online retailers with a bill lawmakers hope becomes law. Opponents argue a law will kill California business and create ugly lawsuits--while Amazon calls the move unconstitutional, threatening to yank ad affiliates in California and effectively slash tax revenue by half.
 
Assemblyman Charles Calderon, a Democrat from Whittier, claims his legislation doesn't impose a new sales tax--that it instead only extends one that California should already have been enforcing. But many disagree, and argue the move is unconstitutional. Either way, the greed for more taxes could shoot California -- and other states that try to follow in lawmakers' footsteps -- in the foot.
 
Backers of the California bill are trying to insist the legislation -- which would force e-commerce retailers, including Amazon, to charge the same taxes collected by their brick-and-mortar competitors -- isn't really about the money: The say it's about being fair.
 
Of course it's only about being fair -- that's what all legislature is obviously about.
 
The bill remains in an iffy spot: It's not clear whether the bill can or will become law. AB155 was part of the budget package approved by Legislature. Governor Jerry Brown told Los Angeles reporters he believes the Internet tax is a "common sense idea."
 
Of course Brown is the guy that made so many promises to California, during his race for Governor -- the fulfillment of which still remain to be seen. Jerry Brown's also the same guy involved in the 'Meg Whitman as a whore' issue that surrounded the gubernatorial race, when someone forgot to hang up a phone. In other words, Jerry Brown is the king of common sense, so when he call something a "common sense idea," ears should perk.
 
Many Republicans reject the bill that they fear will invite ugly lawsuits, drive business out of California -- and push the state into a huge and tangled web of attempts to regulate the internet.
 
Amazon.com Inc. is threatening California tax officials that the online retailer will entirely cut ties with thousands of California affiliates if the state passes the pending legislation. Amazon does not intend to collect sales tax from California customers.
 
Amazon says four bills pending in the California Legislature are either unconstitutional or would “construct Trojan horses” headed toward unconstitutional regulation -- and that the passing of any of those bills, into law, will mean the online retailer will respond by ceasing advertising relationships with more than 10,000 California-based participants who are currently involved in Amazon’s affiliate program.
 
If Amazon terminates its California affiliate program, state tax officials estimate a slash by 50% of revenue the state expects to raise under the pending legislation. Basically, if the bill passes, California state can kiss half of that tax income -- that lawmakers so desperately want -- goodbye.
 
California's been looking for its cut in taxes, the state trying to find a way to get sales tax revenue from out-of-state online retailers who don’t have a physical store presence in the state. But there's been a slight problem in wanting to collect that tax revenue: A 1992 U.S. Supreme Court ruling says retailers cannot be required to collect sales tax in states where those companies operate no physical facilities -- including stores or distribution centers.
 
The pending legislation would deem web site affiliates in a state as constituting a physical presence. That would, in turn, require companies like Amazon.com to collect sales tax for the state. Problem, for California, solved -- or so lawmakers thought.
 
Amazon says not so fast: The online giant says the legislature California lawmakers want won't actually increase state tax revenue for California -- but will reduce income. That's because Amazon plans to return any below-the-belt punch with a whopper of its own. The giant threatens to bail on the state of California -- and take current tax revenue if lawmakers plan to play dirty.
 
“These [legislative] bills would provide no new tax revenue collected by Amazon or others who sever their relationships with California-based advertisers,” says Amazon's Paul Misener. “California consumers would still be able to purchase online...from Amazon’s retail business, so these bills would only deny California-based organizations and individuals the advertising fees they currently receive from out-of-state retailers and, ironically, California’s general fund could suffer a net loss in revenue as affiliates pay less income tax or move out of the state.”
 
Now, that is in fact a great irony.
 
While lawmakers may have thought they had a workaround to put Amazon in a hole, through the ad affiliate route, Amazon has made clear that it's not screwing around -- and has no intention of collecting taxes to be paid to California. The online retailer had noted its severing of affiliate relationships with three states previously: North Carolina, Rhode Island and Colorado. Now Amazon has just added two more to the list, firing affiliates in Connecticut and Arkansas last week -- bringing the list of barred states up to five.
 
All five of those states had a similar target—the attempt to garner tax revenue by enacting legislation, within the past year, to force online retailers to collect sales tax. The Amazon response had been immediate and to the point: Amazon terminated ad contracts with in-state affiliates and refuses to pay a dime for in-state affiliates since the company became targeted. The greed by individual states has proved basically futile -- as North Carolina, Rhode Island, Colorado, Connecticut and Arkansas immediately lost those related taxes.
 
The fight could become worse yet for California down the road -- with potential that the state could be sued by Amazon to block the law, like what's already occurring in New York in a lawsuit that's still pending.
 
Interestingly, one of the biggest fighters of the law -- the once dominating but now more troubled ebay -- has been left out of the California legislation. The bill is crafted to leave that Internet giant relatively unscathed, despite that fact that the online auctioneer is ironically located with California physically -- in San Jose. The bill exempts out-of-state sellers on auction sites whose annual sales to California consumers fall below half a million dollars ($500,000). Meanwhile, Ebay's thrown it's in-state sellers under the bus in the deal: California sellers on the Ebay auction site can look forward to getting slammed by being forced to collect sales tax on more than three sales per year.
 
To get around the 1992 U.S. Supreme Court ruling, lawmakers have attempted to circumvent the decision by expanding the definitions of physical presence. And California lawmakers believe they've got that covered -- but Amazon isn't going down without a fight. If Amazon yanks payment to California ad affiliates and the related program, opponents to the pending legislation note the 25,000 online, in-state affiliates won't be paying taxes on that revenue. Amazon affiliates paid California taxes to the tune of $124 million last year.