California "Amazon Tax" Will Hurt 10,000 Small Businesses

Yesterday’s issue of The Sacramento Bee, the capitol newspaper for California, contained an editorial which I simply couldn’t miss. Let’s start right with an excerpt from it: had $34 billion in sales last year, and is the world’s largest Internet retailer. Sadly, it remains a corporate citizen of questionable ethics.

…The company bases its business model on a refusal to collect sales taxes. By acting as a scofflaw, Amazon is able to save individual customers a few bucks. Overall, the amount of uncollected sales taxes on Amazon’s sales is huge – $83 million a year in California alone.

…Three bills are pending in the California Legislature, carried by Assemblywoman Nancy Skinner, D-Berkeley; Assemblyman Charles Calderon, D-Whittier; and Sen. Loni Hancock, D-Berkeley. …The Legislature ought to pass these bills, which attack the problem in different ways, and Gov. Jerry Brown ought to sign them.

The article also mentions in passing that the “company threatens that if California insists that Amazon collect sales taxes, it will terminate its relationship with 10,000 small-business operators who place Amazon ads on their websites in exchange for payments when visitors click on the ads”. It’s not a threat. They’ve done it in other states that passed a similar legislation (e.g. Rhode Island, North Carolina), and they’ve made it clear that they will do it again.

Just as back in 2009, a law like this will translate into immediate harm for thousands of small businesses (also known as affiliates or affiliate marketers). and have already made it explicit that they will terminate their California affiliates should the pending affiliate nexus tax legislation become law. The New York 2008 situation (with hundreds of online merchants terminating in-state affiliates) may repeat itself, and then 10,000 may end up being the lower-end estimate. Why the terminations? A fellow affiliate marketer, Mark Welch, explained it well in the comments under the above-quoted Sacramento Bee’s article. As he pointed out, the three bills that the newspaper is referring to apply only to “merchants who maintain performance-based advertising relationships with in-state publishers” (aka “affiliates”). So by terminating relationships with its affiliates, Amazon will take care of the situation (in a way I certainly do not support, but they didn’t ask me), continuing to sell online to CA residents without collecting the tax.

Finally, just as in 2009, “besides the obvious income, tax and job losses, the bill could also have a significant long-term impact” with small web-focuses businesses force to “leave California and new companies will choose other states for setting up their businesses, making California less competitive in the tech sector” [more here].

Focusing on Amazon, we’re missing the full picture here. The problem is that thousands of entrepreneurs will get their hands tied, and be forced to either more affiliate-friendly states, or face even less optimistic ramifications.

10 thoughts on “California "Amazon Tax" Will Hurt 10,000 Small Businesses”

  1. This is unfortunate; I know a lot of affiliates that are actually small bricks-and-mortar businesses, i.e. they are an independent bookstore and use affiliate marketing to make some extra money through Amazon. So not only is this going to affect affiliates who operate by themselves, but also businesses who maybe earn the bulk of their revenue offline but also use affiliate marketing to supplement their revenue. Hopefully this isn’t a trend that grows nationwide.

    1. Unfortunately, it already is a nationwide trend. And the saddest part is that legislators are often unaware (uneducated?) of the real consequences.

  2. Another way of looking at the California/Amazon situation is that consumers are $83 million better off for buying from Amazon than they would be if they purchased from a local California retailer. One other vital piece of the revenue puzzle is so often overlooked: Businesses don’t pay taxes, people do. Businesses must make a profit (or at least break even) or they will die. Therefore, business taxes have to be passed on to the customer in order for a profit to emerge after all expenses are accounted for.

    I think it’s essential that people (and specifically legislators) see affiliates as job-producing businesses. And, perhaps even more importantly, many affiliate jobs have been produced in otherwise economically depressed areas.

    It seems to me that government should put the welcome mat out for new businesses, especially small ones like affiliates. Increased competition is good for consumers while the lack of it produces stagnation and even corruption — big businesses and special interests lobby for political favors that benefit them and erect barriers to competition (bank and auto maker bailouts; special government contracts; favorable rules and exemptions that don’t apply to the “little guys,” for example) which is a big negative for consumers who pay higher prices for inferior products.

    So why are states (and the federal government and many cities for that matter) so adamant about taxing businesses when they actually produce new wealth and jobs? Business taxes, by necessity, are inefficiently passed on to consumers so why tax them? I think they do so because businesses are easy emotional targets. In the eyes of millions businesses are “fat cat money-bags” instead of job-producers. If we are not careful we will kill the “goose that lays the golden egg.”

  3. This “the sky is falling” rhetoric is just that. It’s time all businesses are put on a level playing field and have Internet companies collect sales tax.

    1. No, you simply fail to understand the nature of this specific bill. This is not the usual far-right “business killer” rhetoric – this bill WILL kill many in-state businesses, losing up to $150 million in state income tax while providing no significant increase in sales tax income.

      Not only Amazon but all the other major affiliate ad networks will sever ties with California based web publishers, as the have done in NC and IL. As affiliate income is the main source of ad revenue for many small to medium sites, they will lose most if not all income and either leave CA or fold.

      Larger sites with full ad sales departments will be able to skirt the legislation by simply renegotiating their contracts with merchants to avoid being classified as “performance-based”.

      This type of bill is being proposed for two reasons: first, because Walmart is spending a ton to lobby for it, and second, because legislators are as uninformed about the nature of web advertising as you are.

      Why not go all-out and try to levy tax on all sales driven by in-state ads of all types, including TV, newspapers, and CPV ads placed on major websites? Why only single out the affiliate ads favored (for productivity reasons) by smaller sites? It’s simple – unlike major media players, small web businesses have no lobbying clout to counter the big bucks and half-truths being pushed by the likes of Walmart.

      This is a dumb bill proposed by legislators who listen to lobbyist BS rather than taking the time to understand the intricacies of the small businesses they are proposing to tax.

  4. I’ve been watching this for some time and to see it coming to CA is a foreboding thought. Most states follow the “big brother” that CA is. Which I think is foolish, see that they are not always setting the best example.

    The biggest question that I have is if this movement is going to continue on a state level or if the federal system is going to step in and create some umbrella national tax. I don’t like the idea of a wave of new state tax laws, and I’m not sure a federal law would fly, especially with the populous against notional level money grabs.

  5. It strikes me that people just don’t get it. These so called Amazon Tax Laws do nothing to collect revenue. Instead, they simply hurt small businesses and drive them to other states that are more “business friendly.” Ok, so you pass the law, now Amazon simply stops doing business with affiliates in Calf. but they don’t actually stop selling to Calf. residents. Since Amazon has no physical footprint in Calif. they are still not required to collect the tax. So what has been solved? Nothing except hurting the state of Calif. Tax revenues drop as the affected businesses move or lose their income. Do these lawmakers even begin to get it? Do they even read the bills? Do they have even the most basic grasp of the ramifications of their actions? It baffles the mind and yet so many are brainwashed into believing the spin.

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  7. I’m one of these small affiliates who will be affected by this bill. I took up affiliate marketing seriously after I was laid off (I had dabbled before) and I’m petrified what will happen to me if any or all of these laws is passed.

    I’ve been unemployed a long time, my unemployment benefits will run out in a few short months, I can’t even remember the last time I got a call about an interview or a temp job, its been months, and especially given that employers discriminate against those who have been unemployed for an extended amount of time, I don’t have a lot of real hope of finding a new job soon. I’ve earned a little bit of money through affiliate marketing, when I’m not job hunting, I’m working every day, sometimes 15 hours a day, building up my websites hoping to make enough money to cover my expenses in future.

    If these bills pass, I’m screwed. All my hard work will be for nothing. Amazon, eBay, Overstock will all fire me as an affiliate. I cannot afford to move out of state, which is what the richer affiliates will do, thereby depriving the state of corporate and personal tax revenue. I have little prospect of a job, and now I’m going to be deprived of my only realistic hope of staying off welfare and staying out of food banks. I’m trying so hard not to be an unemployment or welfare burden, and now my state is going to screw me over, and all for nothing. They will get nothing from these bills, I predict they will lose money in the end.

    Its just so pathetically sad, so terribly hurtful to us small fry who are struggling and working so hard, and manifestly unfair. I don’t know what I will do.

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