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Mar 09

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Amazon Pushes Back

California State Board of Equalization member George Runner released a statement saying that Amazon.com informed him that they will cut off all California based members of Amazon’s affiliates program if any of four proposed measures currently in the legislature become law.   Amazon’s position came in the form of a letter from Paul Misener, Amazon’s Vice President for Global Public Policy.  It is worth noting that the letter begins by saying that it is in response to a request from Mr. Runner, a former Republican Senator from Southern California.  The BOE’s Chairperson Betty Yee of San Francisco, supports the legislation.
 

Background:
Contrary to much public perception all Internet sales are subject to taxes in California.

  1. Online companies with a business presence in California (called a nexus) are required to collect and pay sales tax.  Of the top ten Internet retailers (Amazon, Staples, Dell, Apple, Office Depot, Walmart, OfficeMax, Sears, CDW, and Best Buy) only Amazon.com would not charge a California resident sales tax.
  2. Customers who purchase from an online company that does not collect sales tax are required to declare and pay Use Tax.  This tax has been in place since the 1930’s.  Beginning in 2003, there has been a line on the California income tax form 540 in order to make reporting simpler.

Use tax reporting from e-commerce however has been dismal.  According to some estimates California will lose almost 1.7 billion dollars in 2011 from unpaid use taxes on e-commerce sales.
 

Legislation
In 2008 New York changed its rules to say that a program that pays mamber web sites to post links to send customers to a retailer, such as Amazon’s affiliates program, constituted a nexus for every member located in the state.  Amazon.com and Overstock.com, appealed both in federal and state courts.  Up to this point New York’s law has been upheld but further appals are expected.  Overstock ended its affiliate program to New York residents, Amazon has not yet done so in New York.
 

Other states have tried to follow New York and enact ‘click-thru nexus’ laws.  Amazon promptly responded by cutting off their affiliate programs, first in Rhode Island and then in North Carolina.  Rhode Island is considering reversing its legislation as a result.  

Colorado passed a different law.  It did not require out of state e-commerce companies to collect sales tax but to inform its Colorado customers about the use tax obligation and to send Colorado a report of purchases so that Colorado could enforce use tax collection.  Amazon responded by suspending the affiliates program in Colorado. 

Currently legislation is awaiting  the governor’s signature in Illinois.  Amazon has already informed all Illinois-based affiliates that they will be discontinued if the bill becomes law.

 

The Legislation In California
Prior attempts by the California Legislature to pass click-thru nexus legislation were vetoed by Governor Schwarzenegger.  In the early days of this legislature two bills were introduced in the Assembly and were followed by two bills in the Senate.  Some of the bills use the New York approach of requiring collection of sales taxes; others use the Colorado approach of requiring reporting to the state and purchaser of use tax obligations.   Amazon’s letter threatens cutoff of California affiliates if any of them passes.
 

Impact
Amazon’s letter is not a bluff.   Given Amazon’s track record in other states, Amazon’s response should be considered almost automatic that they will respond similarly to any sales tax collection or use tax reporting requirement in California as they did in Rhode Island, North Carolina, and Colorado.  Amazon’s determination to avoid paying sales taxes is considerable.  They recently decided to close a distribution center when Texas decided that it meant they had to charge sales taxes on sales in Texas.

Some cite the fact that Amazon has not cut off its New York affiliates as a possible sign that Amazon might keep the California affiliates.  I frankly suspect that once Amazon has exhausted all legal challenges to the New York law then (unless they have succeeded in overturning the law) Amazon will cut off the New York affiliates too. 

Amazon’s affiliate program isn’t as valuable as being able to show the lowest checkout price by not having to include sales tax.  There may have been a time in the infancy of the company and e-commerce in general that all the extra inbound links were vital to building mind share.  But not any more.  Amazon is sufficiently established that they do not need a bunch of folks saying  “Did you know you could actually buy this book online at Amazon.com?”

Which brings up the matter of the warnings about lost jobs if Amazon follows through on cutting off the affiliates program in California.  Although ten thousand sounds like a lot of affiliates, the typical affiliate is a small web site, often a blog, that tries to get a little extra income by including a link.  The only work involved is adding a link to a site/web page that is already being created for some other reason.  The number of persons actually deriving their primary income from being an Amazon affiliate is minuscule.
In response to Amazon’s actions, Best Buy, Walmart, and Barnes & Noble all issued e-mails or posted open letters inviting small business who might be feeling a bit unwanted by Amazon to consider signing up with them.

So would the only effect of the proposed law be to switch several thousand small websites from instead of linking to Amazon.com to instead link to a site that does collect sales tax?  Possibly yes, but there is also a hitch.  That hitch is eBay. 

Generally when an out-of-state company sells to a California resident on eBay they do not have to collect sales taxes even though eBay’s headquarters is in California.  But would the fee that eBay charges the seller become, in effect, a referral fee creating a business nexus for the seller?  All of the proposed legislations have an exemption for small sellers, but the larger ‘power sellers’ on eBay might find themselves needing to collect California sales taxes for California buyers.  So far, eBay has not taken a public stand, but the possible effect on eBay has been a part of the BOE’s legislative analysis of the bill.

What all this is doing, however, is dancing around the real solution.  The real solution would be a common simplified set of rules and the ability for e-commerce firms to deal with a single payment clearinghouse rather than dozens of different state and local sales tax jurisdictions.  Such a solution does exist in the form of (i) the Simplified Sales and Use Tax Agreement that 20 states have already conformed to and (ii) the federal Main Street Fairness Act to allow those conforming states to collect sales taxes from each other.  However, the Main Street Fairness Act did not make it out of committee in the last congress and may stand even less of a chance in the current congress.  Although Washington likes to talk about helping Main Street businesses, they just don’t have the lobbying power and coordinated action of Amazon.  When Amazon pushes back, things tend to move. 

But do you know who else can push?  Those other nine names on the top ten e-commerce firms.  Because Amazon isn’t just getting a lowest-checkout-price advantage against neighborhood stores.  They are getting a lowest-checkout-price advantage against the e-commerce operations of Walmart, Best Buy, Staples, Sears, Dell, and all the rest.  These firms need to realize that getting Amazon and other sales tax avoiders  to pay  is about leveling their playing field too.

Amazon’s power against Walmart’s power…now there’s a more interesting pushing match.

UPDATE:

Governor Quinn has signed the Illinois bill.  Amazon has carried through on its threat and terminated all Illinois based affilliates as of April 15th.  Public messages of support for Governor Quinn’s actions have come from Walmart, Walgrens, Sears, and others.

About the author

Daniel Nolte

Architect, Network Administrator, Computer Forensics Administrator, Voiceovers. website,

Permanent link to this article: http://betweenthenumbers.net/2011/03/amazon-pushes-back/

5 comments

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  1. David Duran

    Good analysis, but you underestimate the negative impact to affiliates and to California as a whole. Amazon is not the only company that will terminate relationships — Overstock and many others will as well.

    Californians will still shop at Amazon, Overstock, LL Bean, etc. They just won’t use the affiliates to get there. Many affiliates will be forced to relocate their business. Sending their traffic to Walmart.com is simply not a realistic alternative.

    Ebates (www.ebates.com), Ken Rockwell (www.kenrockwell.com) and Vegsource (www.vegsource.com) are all good examples of affiliates who would be forced to leave the state if this legislation passes. You might consider talking to them.

  2. Daniel Nolte

    I respect your comment but I think that you overstate your case.

    Ebates does not list Amazon among their hundreds of stores that they use. Most of the sites featured on their home page are sales tax paying. Ken Rockwell and Vegsource are more typical examples of affilliates, but to suggest that Ken’s one page of book links, (as opposed to all his photography) and Vegsources’ four little boxes on the bottom of their home page (as opposed to all the merchandise they sell directly) represents a source of income so substantial, vital, and irreplacable that they would have no choice but to move to a different state to preserve it? It strains credulity.

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