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Should the Internet be Taxed?

Amazon Shuts Down California Affiliates, Following New Tax Law

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By · June 30, 2011 · 258 Comments

On Friday, a new California state law goes into effect that will tax Internet sales through affiliate advertising. Rather than pay such taxes, online retailers like Amazon will instead shut down their affiliate programs in the state. For Amazon, that is said to come to 25,000 sites in California alone.

Was this a wise move by the California government? Tell us what you think.

Democrat Governor Jerry Brown has called it a “common sense idea,” according to one report from the LA Times. Though clearly many disagree with that notion, thinking that it will do more harm that good. Amazon CEO Jeff Bezos has said in the past that the company is protected in the U.S. constitution’s prohibition of state’s interference in interstate commerce:

And in the U.S., the Constitution prohibits states from interfering in interstate commerce. And there was a Supreme Court case decades ago that clarified that businesses — it was mail-order at that time because the Internet did not exist — that mail-order companies could not be required to collect sales tax in states where they didn’t have what’s called “nexus.”

So there’s that, but as my colleague Josh Wolford noted in a recent related article about Texas, more and more states are saying that Amazon affiliates count as physical presences and are enacting sales tax regulations already.

That’s why Amazon has been shutting down affiliate programs. Amazon has told affiliates in the past that they’d have to move to another state to continue earning commissions on referrals. Overstock.com has reportedly done that before too.

It’s worth noting that California’s sales tax rate in general will be dropping to 7.75%. Here is the bill that was signed into law (pdf).

Some groups representing brick and mortars feel the law should be extended on a national level, claiming the taxes take away competitive advantages from Internet retailers that don’t have a physical presence in a particular state. Consumers are able to avoid fees from purchasing from these retailers that they’d otherwise have to pay by buying in-state.

Affiliates have been informed of the termination of their contracts with Amazon. They have received a letter from Amazon saying:

(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.

Danny Sullivan, a California resident wrote Bezos an open letter “thanking him” on his personal blog Daggle. It begins:

“Thank you for your letter today, informing me that after seven years of being one of your affiliates — and having earned for you about $150,000 in that time — that you “deeply regret” unilaterally terminating my contract with Amazon to be an affiliate. I also especially appreciated the part where you reassured me that this action wouldn’t affect my ability to keep buying from your company. Nice touch.”

He goes on to add that while he is fortunate enough to have a successful day job, the loss of income will have a far greater impact on many other affiliates. He also makes a good point about how Amazon will continue to get paid from existing affiliate links without the actual affiliates getting paid.

“I’m not sure how many affiliate links I have on the blog,” Sullivan writes. “Not that many, maybe 25 to 50 in all. But until about an hour ago, those links were worth something to you. Now, because of your squabble over the sales tax issue, you’ve decided to just take for free what you’d previously paid for. If I don’t find time to track down and kill those links, you keep grabbing orders that get made through them and keeping the cut I previously received”

“Over the next day or so, you’re going to get a lot of orders this way,” he adds. “Bigger affiliates will eventually move. Plenty of smaller ones won’t be bothered to change. But those small ones that don’t will add up into plenty of money for your company. You, of all companies, really understand how all that long tail stuff can mount up, right?”

Danny makes some fair points, but the fact that the law was passed is likely to drive businesses away from the state, as clearly they will have no choice if they wish to continue relying on Amazon for income.

jjlwils55, commenting on the LA Times report says, “Okay, here’s the answer…start buying products from overseas companies.  In this day of internet technology, this is a job killer and at the end of the day will not raise additional taxes.”

In the same thread, a small business owner says his company was a victim of similar circumstances all the way back in the early 80′s. “We operated out of Pennsylvania until they ‘needed $65 million’ and ‘targeted only 4 industries’ for a ‘new sales and use tax’. Lots of Exemptions only to the connected cronies in Harrisburg (lawyers of course). WE VOTED WITH OUR FEET AND MOVED TO FLORIDA. We moved the Business and Six Families after ‘growing up there’. We are still angry.”

From the sound of it, there are plenty of people getting ready to pick up and move, or at least consider it, as a result of this California law now. But how long before they are greeted with similar issues at their next destination. You can see how the ordeal has been playing out in various states in this map from TheStreet.com:

Amazon State Map

Amazon isn’t the only one the law will affect, by the way – just the biggest.

What do you think? Should states tax online retailers the way California is doing? Should about federal law? Share your thoughts in the comments.

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There are 258 Comments. Add Yours.

  1. You are missing the point. Amazon’s subsidiaries in CA will force it to collect the tax and not just its affiliates. AMZN currently operates multiple subsidiaries in California, Lab126 their R&D lab in Silicon Valley, IMDB based in LA, and numerous AWS data centers in Northern California. So their claims of not having a physical presence there are untrue, and this law clarifies that a subsidiary counts as a physical presence in addition to affiliates. Even if they drop the affiliates they will still have to collect the tax under the law unless they uproot all of their subsidiaries which will not be that easy. They seem to be dropping the affiliates just in spite, and to try and use whatever leverage they had to attempt to prevent this from passing

    • Seems like a pretty bold move for spite.

    • Just like in Illinois – the claims are untrue. They have physical locations in Rockford and in Fairview Heights. But yet, Illinois affiliates are cut off.

      • Frank
        Reply

        Amazon said that even though they had a warehouse in Texas, only for shipping, they did not have presence here because their head quartered somewhere else. Warehouse here, shipping to customers here = sales tax here. Yes, i have a internet business, i don’t ship most products from here, sales to Texas get taxed, but should i have to charge tax in another state just because my business ships a product from that state. As always, Congress has sat on their hands while this gets out of control. Should be, if you have presence in state, and ship to that state, charge Tax. All other should be tax free.

  2. John Rettie
    Reply

    I think everyone should be paying sales taxes. It’s unfair that some companies are get away without collecting the tax. The solution is to have a uniform national VAT instead of thousands of different local sales tax rates. We need to move tax collection into the modern era.
    In the meantime I think what Amazon is doing to its affiliates is bad. I am boycotting Amazon until they restore their affiliates.

    • Bad idea. If we give government a VAT then it’s guaranteed to be an added tax on top of all the other taxes. Government never eliminates a tax source.

      In terms of fairness, what’s fair about a business not located in a state collecting sales tax for that state? Per the U.S. Constitution a state cannot regulate people or companies that don’t have physical store fronts in the state.

      • John Rettie
        Reply

        That was written before the Internet and needs to be updated. VAT replaced sales taxes in the UK back in 1972 and in my view it is a much better taxation system than sales taxes. I agree it cannot be placed on top of another tax.

    • We’re taxed enough – we don’t need to pay any more damn taxes (that includes Illinois).

        • I hate to burst your bubble on the link, but that is the country as a whole. When TONS of people in our country pay 0 tax, you add those figures to those who are paying tax. Personally, I am taxed about 46% of my income, 46%!!! And the government thinks that they need more of my money?

          The problem is, we have way too many tax exempt people in our country and our government doesn’t know how to spend money.

  3. gene
    Reply

    a nother bad deal from gov. brown

    • And Pat Quinn did it a few months ago in Illinois. It’s an overall bad deal nationwide!

  4. It’s always a fun thing to watch when a politician over-spends (bounces a cheque), how they manage to shift the blame elsewhere. How is it that a politician can bounce cheques and get into debt and there are no consequences to it, but if you or I were to bounce a cheque, there are laws in place that make the writer of aforementioned cheque liable for not only the amount of the cheque, but could also risk imprisonment for it.

    Politicians get paid way too much, considering all the back-room business deals they are involved in and the ROI from them. If you are in debt, let’s start by doing the most common sense thing I can think of: since I’m not getting any ROI, let’s slash your payday to make up for what you did. Let’s start with 10% off the top of any politician making six figures or more. Then keep slashing it by 10% every year following until we make up the shortfall.

  5. Kathleane O'Leary
    Reply

    I’m not political, just trying to earn a living. I’ve spent thousands of hours reviewing Amazon.com books, DVD’s and other products and writing articles geared towards selling these products. This morning I was told that my account with Amazon.com is closed! Not being closed, not pending, just CLOSED!

    Where was my opportunity to weigh in on this, cast my vote, write my Senator, give feedback to Amazon.com … before my income was snatched out from under me? As of today, I’m now out of a job.

    I do like the suggestion to boycott Amazon.com as they did have a choice in this also. It’s not all the big bad government as they’ve portrayed it.

    Meanwhile I’m not going to be watching soap operas and eating bon-bons. I’m going to be working hard to move my blogs to another affiliate program. Watch out Amazon, the CA affiliates you dropped may not be here when/if you want to take us back.

    • My Amazon account is still open, but I can’t participate in the Amazon Associates affiliate program anymore because of the BS they did in Illinois.

    • Look, I agree this was a stupid decision. But you DID get a vote. The Governor is your duly elected representative. Either you voted for him and shouldn’t have, voted against him and lost (in which case you should consider being more active next time), or didn’t vote and got exactly what you deserved.

      You can blame Amazon if you want, but as a businessman I completely sympathize with their position. Perhaps your time would be better spent driving to Oregon or Nevada and getting your affiliate status back. If Cali doesn’t want your income tax give it to someone who does.

  6. The State of CA stands to lose far more in income tax then they would from the sales tax.

    If I save on some purchases by utilizing out of state companies than I have more money to spend on items that must be local: gas, restaurants, groceries, etc.

    It is very short sighted and most politicians who go for the money grab just don’t get it.

  7. The only way this will be effective is if the sales tax stretches across all states. The impact to the few states that have implemented this will be harmful to the individual retailers, seriously affecting their ability to make a living, and to the state as a whole. I do think however, Amazon should have filed suit, rather than pull the plug on its vendors. This is a hurtful act to all the people in California who have helped Amazon to make large profits. Instead, Amazon should have been prepared to immediately file suit, attempt to get an injunction, or something, but not harm the people who have supported and earned profits from them. Maybe California vendors should ban together and file a class-action suit against Amazon for hurting their business.

  8. It’s wrong for States to expect out of state businesses to collect sales tax for them. An affiliate is simply today’s version of a travelling sales rep, and can’t in any way be construed as indicating a business presence in that state. Now, having said that, if Amazon has warehouses or subsidiary businesses in California, that, IMHO, is a business presence.

    FYI, though it’s easy to use Amazon as an affiliate program, many other outfits pay a whole lot better, especially the specialty outfits. It may be a bit harder to manage multiple affiliate accounts, but overall commissions may, after switchover, bump up. Though there is a downside. I recently had a commission from amazon that had nothing to do with what my site was about, so I imagine if I switch out of amazon I may lose some of those commissions.

    My personal opinion about the State revenue crunch is that they should look at how North Dakota avoided all this heartache. http://www.publicbankinginstitute.org/

  9. I like Jerry Brown. I don’t agree with a lot of his politics, but I actually supported him as a Primary delegate in Vermont back in the day.

    While his politics are often misguided this is the first time I’ve ever seen him do something overtly stupid.

    I hope the rest of the country is paying attention because if they DO follow suit these corporations can, for almost no expense, easily leave the country entirely. There are plenty of webmasters in Singapore, Thailand, and China eager to pick up the slack.

  10. Wayne Southworth
    Reply

    It isn’t the companies paying the taxes, it is us, the consumers that are paying the tax!!
    I am tired of paying taxes to fund politicians elaboate lifestyles!!
    Isn’t this the reason the Boston tea party occurred?
    Governor Brown promised “NO New Taxes without voter approval” I guess he lied!

  11. It’s another ploy to screw Internet marketers and webmasters from monetizing their websites. I’ve lost ties with Amazon and The Tire Rack because of crooked actions on behalf of Illinois governor Patrick Quinn and his band of crooked Chicago bastards. (And those sites were the bulk of my affiliate sales!)

  12. Brian Woeller
    Reply

    No! This is just another stupid attempt from politicians to take more from the people who are working and paying taxes, to give it to the people who aren’t. Not one entitlement program has been cut or reduced. Instead, the California politicians keep upping the taxes and fees we pay to support them. I would love to see the look on their faces when they realize they have driven all the working, tax paying people out of the state, and are stuck trying to figure out how to pay all the people with their hands out…except I won’t be here. I, like so many of my friends are moving out of California.

    • The rich gets richer, while the middle and lower (and small business) classes get raped, plundered and robbed.

  13. Ryan Kempf
    Reply

    I really don’t people see the whole entire picture here that is when people shop online like on Amazon nothing comes back in our local economy and that’s bad because if the local economy is not supported people then it can fail and we don’t want that

  14. Uckfay Ohnay. As a good liberal, I love a new tax as much as I love a double mocha lait. But taxing internet sales is an AWFUL idea. Talk about a collection nightmare! 50 states with different taxes. Some taxing residents who buy anywhere, some taxing anyone who buys from a company based in their state. Counties? Cities? ACK. There goes interstate commerce, down the proverbial tubes.

  15. That’s a bad move on the part of California, and one I think Amazon should have opposed more vigorously. I hope it doesn’t start a precedent across America.

  16. The old adage that “truth is the first victim in any war” comes to mind. Just as Bezos and Amazon neglected to concede that they will continue to reap the rewards of building out a huge affiliate network over the past 15+ years, the brick-and-mortar businesses who complain about Internet sales neglect to mention that consumers often pay shipping fees that are usually far greater than the sales tax they would pay on locally purchased items.

    Online retailers hardly have an unfair advantage over brick-and-mortar businesses, except that perhaps they are offering products to consumers who cannot obtain those products at reasonable prices in their local areas.

    • I’d rather suffer the consequences of paying $3.95 for shipping and handling for a book than suffer higher costs including sales tax!

  17. giving states more tax revenue is just letting them waste more and more money. they will not increase revenue with this move. it will have the opposite effect. but it should be kept in mind that states cannot control their habits. they are addicts like compulsive gamblers.

  18. William Anfin
    Reply

    I have to side with Amazon – it is not fair that they have to pay taxes in some states and not in others. The politicians are going through a “penny wise, pound foolish” deal by trying to collect sales taxes by using affiliates as a presence in a state – the actual transaction could be happening on a server in Canada for all we know.

    Amazon is not cutting off affiliates for spite – why should they want to pay a state’s sales tax AND affiliate commissions when they have an option (currently) to not pay both? Amazon is not stupid – if their sales tank due to lack of affiliates, they will bite the bullet and bring back the dropped affiliates. No offense to Danny Sullivan but I believe his comments are strictly based on his own self interests – gee, that’s what Amazon is doing so it seems like it is the pot calling the kettle “black”…..

  19. This is a national problem, and it should be addressed on a national level. There should be a simple national tax rate for online orders. It should apply to all sales to states other than the one in which the business is located. Too many states are losing tax income when it is needed to help them stay solvent. The internet business model has operated long enough to be stable. The sales tax break they had to help them get established is no longer justified. We need a level playing field.

    • Hmm. Mail order business existed long before the internet. There hasn’t ever been a national sales tax and it’s a poor idea to start one now, since sales tax hurts the poor and middle class the most, proportionally. Not only that, but do you really think the dough will end up back in state coffers? I doubt it. It’ll probably go to help pay the 20 billion dollar air conditioning bill incurred by our military presence in Iraq and Afghanistan.

  20. fountainway
    Reply

    This is an injustice!!.

  21. Come on guys, any time you have a democrat in office, either locally or nationally, there will be new taxes, talk of new taxes or an increase in taxes.

    • William Anfin
      Reply

      Yeah….and Reagan raised taxes 7 times in his 8 years in office. You might want to do some due diligence before blaming Democrats.

  23. No, I DO NOT think the Internet should be taxed. If I sit in my home in one state and I make a purchase online (cyberspace) and the order gets placed in another state, how can you say I purchased something in another state that I’ve never actually been to? Furthermore, if you look at the technical aspect of what really happens when we surf the Net, we don’t actually go anywhere; the webpages are downloaded to us. So, when we click to buy, we’re actually making a purchase at our location not the other way around. These states that want to tax online purchases are desperate for tax revenues and will do anything they can to get them. This actually boils down to taxation without representation.

  24. Bill Wagner
    Reply

    We are already taxed to death. We need to cut some of these special perks for the politicians and their business world buddies. Maybe then, we can do some good in the world and fix some of our desperatly failing infrastructure before people are killed while driving accross a bridge that was built 60 years ago while trying to get to work to pay all of those taxes.

  25. Since I am not a brick and mortar business this recent change is very annoying on several levels.

    Probably my biggest issue is that it interferes with interstate commerce.

    Next, to my knowledge, this is selective enforcement since most of the commerce being conducted is via mail order and none of the non-internet (aka traditional) mail order companies are being taxed like this.

    Also, I pay taxes on the commissions I make already. Now that Amazon has killed this opportunity (but will still collect from those links already established over the ten years I’ve been an affiliate) California will not benefit–and neither will my business.

    All the way around, this is an irresponsible move that I hope to see challenged in the courts.

  26. Hey Chris,

    Another great topic that I believe should be dealt with in a common-sense way. I have mixed feelings about this issue:

    First of all, our government and certain State governments (like California) have managed to take what was originally a voluntary act (paying taxes) and make it into a legally enforceable requirement. A crime for those who refuse to comply, or “evade” it altogether.

    Second, and more to your question, the online businesses that are making sizable profits and can afford to assist in the support of the government should do so – since Uncle Sam and California seem to be going broke anyway – but I don’t believe small Internet companies and Webrepreneurs should be compelled to pay taxes.

    Third, it seems to me that Amazon.com has chosen to shut down its affiliate programs based more on strong opposition (philosophical disagreement) than the added expense it would incur, because they have the right to send W-9′s to all their affiliates and let them deal with their own tax-payment situation.

    Outside of hiring expensive accountants and tax lawyers to “avoid” tax payments, the expense to Amazon.com should not threaten their Internet operations in the least; But if the company has to hire such professionals to keep its tax liability to a minimum, then the best step may very well be the one being taken.

    What about all the affiliates who relied on the Amazon.com “affiliate program” for their livlihood? I say work it out! Find a way to impress upon the State of California or any other State that tax revenue from Internet business cannot and should not be enforced in the same fashion as a traditional (brick and mortar) business. No criminality attached to an act of refusal to pay. Thanks.

  27. Dennis
    Reply

    Sounds like away for them to miss manage more funds like always!

  28. Damon Palame
    Reply

    How does Amazon determine where the affiliate is physically located? Couldn’t you have a p.o. box or address in a neighboring state with a mail forwarding service? Then you pay income tax on those earnings to the neighboring state? It would take some set up and management, but wouldn’t kill your business. Is that possible?

  29. Really stupid politicians !!
    on one side they are encouraging stimulus plans and on one side they are trying to put new taxes.Really sincere moves.Congratulations for being so stupid. Can be a friend of Homer Simpson but no Homer is more reasonable and he is a devoted Dad.

    Dad of a son and a businesman

  30. Dale
    Reply

    Well it’s a dumb idea decided by the best and brightest California has to offer. It’s amazing the older I get intelligence doesn’t keep pace but dumbness accelerates. Anyway, wanna tax the internet? Tax ICANN. $100/yr for each name. Why $100? Keeps the riff raff out. Yup put a hefty federal tax on every domain name and distribute it to the appropriate state based on population. It’s more efficient. Cali’s gotta hire “Internet Police”. Think they’ll pat down yer computer? Hee hee… Taxing ICANN may not be legal, but a tax is comin. Only big companies like Amazon, with deep pockets, can fight this. We lil guys are screwed.

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