Affiliates who sell through the Amazon.com Associates Program received an email from the company today announcing the program will be terminated for California residents as soon as Jerry Brown signs the bill creating the tax, which he did yesterday. The bill, which was co-authored by East Bay State Senator Loni Hancock, was passed by the legislature as part of the hard-won deal that balanced the budget.
Overstock.com also announced it was dropping its California affiliates.
(Click here for selected tweets from disgruntled Amazon affiliates...)
The L.A. Times has a good article up on the implications of the new law, not the least of which is that purchases made by Californians on the Internet will now be taxed. So-called brick-and-mortar businesses have complained for years that the sales-tax exemption for big online retailers that do not have a physical presence in the state put them at a huge competitive disadvantage. But come July 1, consumers will no longer be able to do an end-around on paying the tax by purchasing online. So even though the state sales tax will drop one percent, if you do a lot of online shopping of big-ticket items, will you come out that much ahead?
But Dana Hull in the San Jose Mercury News had this to say:
It remains far from clear, however, that the law will succeed in forcing Amazon and other online retailers to collect the sales taxes. When other states -- including Illinois, Arkansas and Connecticut -- passed similar online sales tax legislation this year, Amazon severed its ties with affiliates in those states as well. Amazon is challenging a similar New York law in court, so the issue of how far states can go in their efforts to collect online sales taxes may ultimately be headed for the U.S. Supreme Court.
The Supreme Court ruled in 1992 that states can't force businesses to collect sales tax if they have no physical presence in the state where goods are purchased. So the new California law broadens the definition of what it means for a company to have such an in-state presence. From the LA Times:
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.
Update Thursday: Business columnist Andrew S. Ross in the Chronicle today, on the severing with of affiliate web sites:
Whether Amazon follows through remains to be seen. It has done so in Illinois, Connecticut and Arkansas, where laws are on the books, but not in other states, such as New York.
And something I've been wondering myself:
What Amazon gets out of its move is not entirely clear. Apart from losing the income generated by the affiliates, the company would still have to pay sales taxes on goods purchased by Californians directly from its site, assuming the law stands up to likely legal challenges.
Even if they axe the affiliates, they still have the related in-state businesses that the Times mentions above, which under the new law would still qualify them as obligated to collect the tax.
And this from the Sacramento Bee today:
By dropping its California affiliates, Overstock believes "we will not be subject to the obligations," said Mark Griffin, the Utah company's general counsel.
But Assemblywoman Nancy Skinner, one of the leaders of the sales tax effort, said in a statement that e-sellers will have to collect the tax even if they cut off their affiliates.
"We hope that Amazon and Overstock rethink these bullying tactics," said Skinner, D-Berkeley.
The law might apply to Amazon regardless of how it treats its affiliates. The law is written to cover merchants with subsidiary or related companies in the state. Amazon operates multiple subsidiaries in California, including a Silicon Valley company that designed the Kindle e-reader.
We're going to try to provide clarification on all this sometime today... Stay tuned.
Update 3:30 p.m. Two weeks ago, when the online sales tax passed the first time but didn't become law because of the governor's veto of the overall budget bill, KQED's Peter Jon Shuler talked to the company-formerly-known-as-Overstock.com President Jonathan Johnson about his opinion on the matter. He also said the company (which ironically enough bought the naming rights to the Oakland A's stadium in April) would also drop its California affiliate members if the bill became law.
"Companies like O.co and Amazon and others are going to be forced to terminate their relationships with those affiliates rather than be forced to be unconstitutional sales tax collectors for the state of California," Johnson said. Johnson said the bill would end up decreasing revenue for the state.
Listen to O.co president Jonathan Johnson on the online sales tax law