The California Budget, The Amazon Tax and Unintended Consequences


It never ceases to amaze me how short-sighted politicians can be. Case in point is the Budget just passed by the California Legislature. In this budget is the so called “Amazon Tax”. The Amazon Tax is an issue that has been pushed for the last three or four years without success until recently. It was included in this year’s budget legislation, which Governor Brown signed a few days ago.

What is the Amazon Tax, you ask? Simply put, it requires out of state businesses to collect and pay California sales tax for shipments into the state. Sounds fair, right? In 1992, the U.S. Supreme Court issued a ruling that set the precedent for sales tax collection on internet sales. Basically, the ruling says that companies are not required to collect sales tax for shipments into a given state if they do not have a physical presence (a “nexus”) in that state. What the California law does however, is make an end run around that ruling by making it so having Affiliates that live in California gives the companies a nexus, thereby subjecting them to the sales tax requirements. Nevermind the fact that Affiliates are independent contractors that do not work for the companies.

The net result is that companies like Amazon.com and Overstock.com will now have to collect and pay California sales tax for all shipments into the state. Once again, sounds fair, right? This puts them on a level playing field with brick and mortar businesses in California, so how can it be bad? Especially, when California’s financial position is one of the worst in the country and can use all the revenue it can get. Legislators estimate that the new law will increase sales tax revenues in the range of approximately $317 million (in large part from Amazon and Overstock, I might add). There’s just one teensy little problem…

Amazon and Overstock have said many times that if the law passes, they will immediately terminate all of their Affiliates (about 25,000) in the state, which will eliminate the claimed “nexus” and also prevent them from being subject to the law. They have both already done this in other states that have passed similar legislation. Governor Brown signed the law on June 29th. Late that evening, I received the following email:

Hello,

Unfortunately, Governor Brown has signed into law the bill that we emailed you about earlier today. As a result of this, contracts with all California residents participating in the Amazon Associates Program are terminated effective today, June 29, 2011. Those 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 before today will be processed and paid in full in accordance with the regular payment schedule.

You are receiving this email because our records indicate that you are a resident of California. If you are not currently a resident of California, or if you are relocating to another state in the near future, you can manage the details of your Associates account here. And if you relocate to another state in the near future please contact us for reinstatement into the Amazon Associates Program.

To avoid confusion, we would like to clarify that this development will only impact our ability to offer the Associates Program to California residents and will not affect your ability to purchase from Amazon.com, Endless.com, MYHABIT.COM or SmallParts.com.

We have enjoyed working with you and other California-based participants in the Amazon Associates Program and, if this situation is rectified, would very much welcome the opportunity to re-open our Associates Program to California residents. As mentioned before, we are continuing to work on alternative ways to help California residents monetize their websites and we will be sure to contact you when these become available.

Regards,

The Amazon Associates Team

So, what’s the end result here? Based on Affiliates being terminated, Amazon (and others who do the same) will not be subject to the sales tax requirements and the estimated $317 million in claimed revenues to the State of California will never materialize. In addition, the 25,000 Affiliates that live in California (myself included), just lost some of their income in a bad economy. More importantly, the income those Affiliates earn translates into $124 million in income taxes, which the state will no longer receive.

The net effect is $124 million in lost revenues instead of a $317 million gain, while at the same time, making it more difficult for 25,000 Californians to earn a living.

Brilliant.

This was 100% predictable. Amazon and Overstock said many times that they would terminate their Affiliates, just as they have in other states. Yet, the California Legislature, in a crack-like need for more taxes, ignored the obvious and passed it anyway. Would we really expect anything different in California though? Our Government officials have been running this state into the ground for decades, yet we keep voting for the same politicians. These are people that don’t even understand the basics of high school economics, yet we keep entrusting them with our State’s finances? And the Governor? I really thought we learned our lesson after the first time we elected Governor Brown, but apparently I was mistaken.

But don’t listen to me…

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+Kevin A. Nye

George Runner, State Board of Equalization

Orange County Register

Los Angeles Times

California Watchdog

Orange County Register (again)

“About Stuff” Image credit: Keoni Cabral


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