Governor Jerry Brown signed into law a California tax on Internet sales though affiliate advertising. Experts believe that this law will immediately cut small-business revenue 20% to 30%. The bill, AB 28X, takes effect immediately. The state board of equalization believes that the new bill will bring in $200 million a year in additional revenue for the state. Contrarians think that this tax will just force online retailers to end their affiliate programs, which will not lead to the generation of any new tax revenue.
Amazon has already emailed 25,000 websites it has an advertising affiliation with. A portion of the letter states:
(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.
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.”
Amazon believes that the law will not affect consumers. Rebecca Madigan, executive director of the Performance Marketing Association, states “This law won’t impact Amazon that much but it is a crisis for website owners who make revenue by placing ads on their websites for thousands of online retailers…Most of them don’t have a physical presence in California.” Madigan indicates that almost all of Amazon’s California affiliates have fewer than 75 employees and a large percentage have no employees.
The California Retailers Association stated: “We thank Governor Jerry Brown and the leaders in the California State Legislature who have demonstrated their leadership and commitment to California businesses by passing and signing e-fairness into law. Small and large businesses across the state have been held at a major disadvantage by the current law that out-of-state online companies like Amazon.com and Overstock.com have exploited for years. This has cost us jobs and revenues.”
In 1992, the U.S. Supreme Court ruled that states cannot tax businesses that do not have a physical presence in the state. However, in 2008 New York passed a law which requires companies with an online affiliate advertising program to collect sales tax for sales through those affiliates based in New York. Rhode Island, North Carolina, Illinois, Arkansas, and Connecticut have passed similar laws. Amazon is suing New York over the law and Performance Marketing Association is suing Illinois over their law.