by Jan Norman
Amazon terminates deal with Calif. affiliates
How do Amazon affiliates lose out?
Hey Jerry, they cancelled my affiliate contract
Online sales tax coming to a computer near you
Thousands of small-business owners – not to mention schools and nonprofits – are scrambling to figure out how much revenue they’ll lose as hundreds of online retailers cancel their affiliate programs in response to California’s new Internet sales tax law.
On June 29, Gov. Jerry Brown signed a bill into law requiring online retailers that use affiliate advertising on California-based websites to start collecting sales tax on purchases from California customers.
Amazon and many other online retailers have terminated their affiliate advertising agreements with California-based websites because of a new law that would require the retailers to collect state income tax.
A state can require only businesses with some physical presence within its borders (called nexus) to collect sales tax on purchases from Californians. This new law defines these California-based affiliates as the nexus for online retailers.
Immediately, Amazon.com and many other online retailers terminated their affiliate programs with an estimated 25,000 websites.
Here’s how affiliate programs work: A website has an ad with a hotlink to an online retailer. If a site’s visitor clicks on the link and buys something, the site’s owner receives a small commission. Many of the sites are for-profit businesses with employees, and others are museums, charities and schools that have benefited from the business model.
The new law has been called the Amazon law, because the online retailer is by far the biggest user of affiliate advertising. According to the Board of Equalization, the biggest online retailers with California affiliates are Amazon.com, LL Bean, Overstock.com, Redcats, Vistaprint and Drugstore.com.
Supporters of the law estimate it will bring $200 million to $300 million in sales tax each year to financially-strapped California plus it will level the playing field for retailers with physical shops in California that have to collect the 7.25 percent to 8.75 percent in sales tax on every purchase.
But many of the small-business owners who are losing their affiliate advertising revenue say the state won’t get any more income because many online retailers will not cooperate.
California residents can still buy from online retailers that have ended their affiliate programs without paying sales tax, so critics argue California will not gain any sales tax revenue and may lose income tax from in-state affiliates that lose income.
Tom Messick, owner of employeemall.com in Yorba Linda, provides employee discount programs for hundreds of companies nationwide. He has affiliate relationships with 300 companies that pay him a commission when employees use their products or services, such as yoga. He estimates the revenue is about 25 percent of his business.
Amazon is not one of the companies Messick is affiliated with. But to date, 15 of these companies have terminated their affiliate programs with Messick and other California firms “and the notices are coming in on a daily basis,” he said.
“It’s not so much the loss of revenue,” Messick said. “What bother me is having a competitive disadvantage with companies in other states that provide employee discounts.”
SurfMyAds.com in Santa Monica will be hit even harder. The company operates an international network of shopping sites such as PromotionalCodes.com, CouponWinner.com, myShoes.com and Coupons.ca. Affiliate commissions are the company’s primary source of revenue.
“So far we have received termination notifications from just over 100 of our merchant partners,” said Alexis Caldwell, director of affiliate and partner marketing. “However, we expect this number to increase over the coming weeks as more merchants receive word from their legal teams that they must sever their ties with California affiliates.”
Ebates in San Francisco is another online shopping site that has an active affiliates program. It has received more than 60 termination notices from online retailers. “We will see what the impacts are on our business over the coming weeks,” said Ebates official Rob Smahl. “If we cannot restructure our working relationships with the retailers who terminated their affiliate programs, then we will consider all options as necessary up to moving out of state.”
Loren Bendele, CEO at Savings.com in Los Angeles, said, “Essentially this is a California small business tax, so ultimately it hurts businesses like ours. When Illinois passed this law, all the major players in our industry moved out of the state. I’m afraid this will have a similar impact on California and cause the tech industry to migrate to other states.”
The Board of Equalization, which administers California’s sales tax, will soon start notifying out-of-state retailers that they must register and start collecting the sales tax on California purchases and hope for voluntary compliance, said spokeswoman Anita Gore. Those that fail to register will eventually received bills based on estimates of their tax liability and if they don’t respond or pay, the board can put liens on their (out-of-state) property and bank accounts.”
Although Amazon immediately terminated its affiliate program, California’s new law has been written in such a way that the retailer is singled out to collect sales tax without its affiliates. The law requires an out-of-state retailer to collect California sales tax if it has subsidiaries in California.
Amazon has several subsidiaries located in California including Lab126 in Cupertino that designed the Kindle and a soon-to-be released tablet.
Amazon has not yet responded to several Register inquiries about its reaction to this aspect of the law. Amazon is the only company affected by this provision, according to David Duran, spokesman for Board of Equalization member George Runner.
Runner and board vice chairman Michelle Steel maintain that the new law is unconstitutional.
“This law will not only hurt those Californians now out of work, but also the businesses where they used to shop,” Steel said in a prepared statement. “Though the legislature has required BOE to carry out this misguided law, it will create no new revenue and instead cost the state lost income taxes from lost jobs and expensive legal fees from drawn out litigation.”
She noted that Amazon’s lawsuit against New York for a similar tax has been going on for three years. A court struck down Colorado’s online sales tax law and Rhode Island and North Caroline report their online sale tax laws have brought in no new revenues.
Contact the writer: 714-796-7927 or jnorman@ocregister.com
“Thousands of small-business owners – not to mention schools and nonprofits – are scrambling to figure out how much revenue they’ll lose…”
Way to go California! Those schools and nonprofits will be hurt more than anyone with their tight budgets.
“Amazon has several subsidiaries located in California including Lab126 in Cupertino that designed the Kindle and a soon-to-be released tablet.”
Will this result in another business moving to Texas or other business friendly states? Laws havfe consequences and should be written in such a way as to encourage business. A vibrant business atmosphere means that everybody wins, consumers, the employed, business…and government!
Stupid is having a a hostile, confiscatory attitude toward those who make it all work.
Nothing, not even sales taxes, will keep Amazon from offering it’s own product, the Kindle, for sale in California … a humongous market.
“Amazon affiliates” are independent sellers, a la eBay, who contract with Amazon to sell via their website. Amazon don’t want to be bothered with collecting California taxes for the California vendors and Minnesota taxes for the Minnesota vendors … and so on.
That is, not just now. Soon (if not already) they will have developed the software to manage it. It’s just a matter of extorting some fee or other from the California vendors. First you cut them off. Makes it so much easier when you allow them back aboard, for only a slightly increase service fee.
Get a clue, will you!
thanks for this article.
I don’t like sales tax at all, but the idea that I am supposed to pay it for purchases I make from an out-of-state vendor by way of an out-of-state seller was really offensive. I see here, I only have to pay it on purchases originating in California. We don’t buy anything from California – in case anybody hasn’t noticed, California doesn’t produce anything but bureaucrats anymore.
So, where they got their projected figures – from a Doctor Suess book? Just like Jennifer Hennessy’s figures for our Chico budget – they just make this stuff up out of the smoke floating over their back room deals.
Just look at the thousands of jobs this law will create! Moving companies will hire more workers to help businesses shift their operations to NV or TX, where taxes and regulations are not so onerous.
Anyone who voluntarily stays in CA had better get ready to shell out more $$ to the clowns in Sacramento. The pie-in-the-sky budget they just passed depends on $4-6 million in new economic growth. Driving business out of CA isn’t going to help with that.