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Business Cuts Ties with California Affiliates After State Passes Bill to Collect Online Sales Tax

Newly approved budget will enforce a 'use tax' law created in 1935 and could generate more than $200 million a year in revenue ended its affiliate advertising program with 10,000 California Web sites after Gov. Jerry Brown signed a budget bill Thursday giving the state additional power to collect taxes on online sales.

The budget, Assembly Bill 28X, requires online retailers with in-state affiliates, such as Amazon, Overstock and eBay, to collect sales taxes. Affiliates include blogs and other Web sites that direct shoppers to online stores and collect commissions for sales.

The move is estimated to produce $200 million a year in new state and local government tax revenues, but Amazon thinks differently.

“(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,” Amazon wrote in an email to its affiliates. “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.” is an online marketing company and Amazon affiliate that started its business in Santa Barbara five years ago. It had received 57 termination notices Thursday, which Alexis Caldwell, director of affiliate and partner marketing, said will affect a significant portion of the company’s revenue.

“It definitely impacts us and affiliates who their entire company is wrapped up in some of the merchants that Amazon is severing ties with,” she said. “It’s impossible to do business the way it has been done.”

Caldwell said the imposed tax will only deny California-based organizations the advertising fees they receive from out-of-state retailers, and affiliates will either pay less income tax or move out of the state.

“I’m all about collecting more taxes, but I’m frustrated because I know this isn’t going to work and it will cause the state to lose money,” she said.

AB 28X allows enforcement of California’s “use tax” law. The tax, created in 1935, is supposed to be paid by California consumers on all taxable goods purchased out of state.

Although legally bound, most consumers don’t report purchases from out-of-state retailers and avoid the tax altogether. Assembly Majority Leader Charles Calderon, D-Los Angeles, said in a statement that California loses millions of dollars in revenue from unreported use tax that could be attributed to out-of-state Internet sales.

Brendan Huffman, executive director of the Chambers of Commerce Alliance of Ventura & Santa Barbara Counties, said Amazon will have a strong case against the bill because the onus is on the consumer.

“The moment this bill is signed into law, (Amazon) will argue against the regulation of interstate commerce and also that the onus is not on retailer to collect sales tax,” he said.

Before the passage of AB28X, a 1992 U.S. Supreme Court ruling deemed it unconstitutional for California to make retailers collect the tax unless it has a physical in-state presence.

But New York passed a law to require companies with online affiliate advertising programs to collect sales tax for sales through those affiliates based in New York in 2008. Since then, Arkansas, Connecticut, Illinois, North Carolina and Rhode Island have passed similar laws.

Amazon is suing New York over the law, and the Performance Marketing Association is suing Illinois.

“(The state) didn’t have a choice, ultimately California needs more revenue, and I don’t disagree with the fact that it would be great for the state to collect sales tax on out-of-state retailers,” Caldwell said. “But the way they are going about doing it, by targeting affiliates and serving this pseudo nexus charging out-of-state businesses for their California affiliates, is not the way of doing it.”

Noozhawk business writer Alex Kacik can be reached at .(JavaScript must be enabled to view this email address). Follow Noozhawk on Twitter: @noozhawk, @NoozhawkNews and @NoozhawkBiz. Become a fan of Noozhawk on Facebook.


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