California’s Referendum on the Advertising Tax

You probably haven’t heard about my state’s referendum on the Advertising Tax. It’s not a ballot proposition. It’s the gubernatorial election.

Politics are complex. Many readers will bristle at my boiling down California’s election between Democrat Jerry Brown and Republican Meg Whitman to a single issue.

[To set aside all other issues I’ll just say that politics in the United States today (and California for sure) are not working they way they should. Personally, I don’t want to see the State Legislature and the governor’s mansion controlled by a single party. Neither has shown the responsibility in governing to deserve it.]

AB178 / AB2078 / etc…

The Advertising Tax began in California as AB178 a couple of years ago. It was co-sponsored by Assm. Charles Calderon, a Sacramento veteran who has many years of fighting for good causes and effecting change, and new-comer Assm. Nancy Skinner. Unfortunately, they were sold a bad bill by a lobbyist for many of the trade unions. What do the trade unions know about online sales? Just the false promise of increased sales tax revenue.

No one bothered to evaluate the negative effect the legislation would have on California’s small businesses such as mine. AB178 couldn’t make it out of the Revenue and Tax sub-committee and was snuck into the State’s budget in a trailer bill at the eleventh hour. Governor Schwarzenegger vetoed it and made a strong statement about it after Overstock terminated 100% of its California affiliates. We were reinstated into the program the next day.

The State Legislature is consider both New York and Colorado versions of the bill. There is a coalition of large and small businesses fighting these bills. We’ll see what happens with it.

The Advertising Tax, Jerry Brown and Meg Whitman

I haven’t seen any statements from either candidate about the Advertising Tax so you might be wondering why I boil the election down to this one issue. Simply put, if Jerry Brown wins, I predict that the Legislature will pass the most encompassing version of this bill in the first 90 days of its session and Governor Brown will sign it. It will be hailed as significant legislation to generate revenue and level the playing field for brick-and-mortar and online stores. The next day California’s affiliates will see significant portions of their revenues disappear as stores that do not have nexus in California terminate their California affiliates (Amazon and Overstock probably will do so prior to the legislation taking effect).

Other stores might decide to go the route of Drs. Foster and Smith and simply close down their affiliate programs in total.

In the end, there will be few stores that start to collect sales tax from California residents and the State will see its income tax revenue decline as affiliate move out of state, sell to out-of-state companies, go bankrupt or simply just have their revenues decrease. I don’t see this as a good solution for California… and I think that Meg Whitman will veto every version of the bill, not to help eBay which is opposed to the legislation but because she understands the harm the bill will do to California’s tech industry and that it won’t help the State or brick-and-mortar stores.

I’m voting against the Advertising Tax!

About David Lewis

David Lewis is CEO and Co-founder of Prycing. He’s been around affiliate marketing for a long time.

Twitter: thedavidlewis

5 Responses to California’s Referendum on the Advertising Tax

  1. David,

    Great article and perspective. This might be true if the Assembly and Senate maintain their Democrat majority. Or do you think the Republicans will gain majority in either of the houses?

    That being said, while the ad tax is generally opposed by Republicans and generally favored by Democrats, the sponsor and advocate in the Virginia Senate was a Republican.

    I guess the only answer I can see is that the ad tax won't be going away next year. We've beaten it back 13 times this year, but in an election year, everything is re-set.

    –Rebecca

  2. David Lewis says:

    Rebecca-

    I don't think that the Republicans have a prayer of getting a majority in either house of the California Legislature any time soon.

    Then again, I didn't think that any non-incumbent moderate would be able to win the Republican gubernatorial primary but Meg did.

    Thanks for all of your work fighting the Advertising Tax and promoting performance marketing!

    -David

  3. […] California’s Referendum on the Advertising Tax […]

  4. I think you could be right about the consequences of CA passing such legislation, especially for smaller affiliate businesses.

    That said, it wouldn't be difficult for the bigger affiliate businesses to change their business model from a traditional CPA business model to a CPC or CPM model. All they would have to do to maintain relationships with Overstock and Amazon is show them what the current effective CPM or CPC is and change the terms of the relationship. If these bigger affiliates have good enough relationships with Overstock and Amazon, it shouldn't be a problem.

  5. Interesting point about changing the compensation model. Ebay has done that with their cpc based on quality score.

    That being said, legislators are gunning for Amazon. They are the primary target. Even though one could argue the details that CPC is excluded from the law, interpretation and enforcement can be so broad as to go after Amazon anyway.

    As a matter of fact, in Colorado they passed the ‘Big Brother Sales Tax’, that seemingly has nothing to do with affiliates. But there’s this language in there about a ‘controlled group of corporations’, which Amazon feels is broad enough to potentially include their affiliates, so they terminated them anyway.

    “How do we collect sales tax from Amazon” is the first question asked in every state.