The Affiliate “Big One” Hits: California Passes Catastrophic Nexus Tax

An earthquake of a different sort hit California this week when Governor Jerry Brown and the state’s Democratic lawmakers struck a budget deal that included passage of its “Amazon tax.” Despite warnings from Amazon.com, Overstock.com, and other affiliate networks, plus direct appeals from affiliates desperate to protect their livelihood, California appears headed down the same path as New York,  Colorado, and Illinois,

To get around a “1992 U.S. Supreme Court ruling that sellers can’t be forced to collect sales taxes unless they have a physical presence in the state,” the California law requires the collection of sales tax when:

1) companies (like Amazon) pay commissions to site owners in California that refer buyers

2) a company operates a facility in the state

Proponents of the bill estimate that establishing nexus for online retailers in California via affiliates will generate $200 million per year. However, that number assumes the affiliates currently based in California will 1) stay in California; and 2) still have access to affiliate networks to be taxed. Amazon and Overstock haven’t made empty threats. When they say they’ll leave if a state passes a nexus tax, they leave. Last May, Jeff Bezos reiterated Amazon’s intent to fight against such laws in comments at the ShopSmart Shopping Summit: “We will continue to drop states who pass those affiliate laws, from the affiliate program.”

Upon its passage, Amazon sent a letter to its affiliates notifying them of the possibility that it will close down its California affiliate network. It reads, in part:

For well over a decade, the Amazon Associates Program has worked with thousands of California residents. Unfortunately, a potential new law that may be signed by Governor Brown compels us to terminate this program for California-based participants. It 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.

As a result, we will terminate contracts with all California residents that are participants in the Amazon Associates Program as of the date (if any) that the California law becomes effective. We will send a follow-up notice to you confirming the termination date if the California law is enacted. In the event that the California law does not become effective before September 30, 2011, we withdraw this notice. As of the termination date, California residents will no longer receive advertising fees for sales referred to Amazon.com, Endless.com, MYHABIT.COM or SmallParts.com. Please be assured that all qualifying advertising fees earned on or before the termination date will be processed and paid in full in accordance with the regular payment schedule.

Overstock announced Wednesday that it will also sever affiliate relationships with California residents.

As I noted in an earlier post, California’s estimated 25,000 affiliates (approximately 10,000 are associated with Amazon) generate $124 million in income tax annually. So with the stroke of pen, Governor Brown puts at risk $124 million in state revenues with no guarantee that anything close to an additional $200 million will be added to the state’s coffers.

What  happens next?  California affiliates still have the option to connect with brick-and-mortar retailers (who already collect sales tax because of their physical presence) and establish relationships with the likes of Walmart and Sears. A few months back, Barnes & Noble reached out to spurned affiliates, specifically positioning themselves as an alternative to Amazon and other  affiliate networks that pull out of states due to tax issues.

Writing at the San Francisco Business Times, Sarah Duxbury captures perfectly what I suspect many affiliates are feeling right now:

“I am thinking about the here and now, and for now I can’t help but wonder how long Amazon will stick with its current zero-tolerance policy and its practice of political lobbying by sticking it to the little guy. After all, several states have already stood up to Amazon, and California is itself amazonian in its population, its affluence, and also in its number of affiliate marketers and Amazon Associates.”

Perhaps California becomes the catalyst for fixing this issue at the national level.

 

About Britt Raybould

Britt Raybould has a passion for telling stories and she specializes in helping companies figure out how to tell their own stories. Through her firm, Write Bold, she shows companies how storytelling can define them, both to their customers and within their industry. When she remembers to, Britt blogs on her personal sites at bold-words.com and brittraybould.com. You can find Britt on Twitter @britter.

Twitter: britter

11 Responses to The Affiliate “Big One” Hits: California Passes Catastrophic Nexus Tax

  1. Rebecca Madigan says:

    I just want to correct the states where these laws have passed – so advertisers don’t inadvertently terminate affiliates in the wrong states**. Affiliate nexus tax laws have passed in the following states:

    New York (2008)
    North Carolina (2009)
    Rhode Island (2009)
    Illinois (2011)
    Arkansas (2011)
    Connecticut (2011)
    California (2011) – just passed today

    Other states have passed laws that establish nexus via a controlled group (Colorado, 2010), or requiring a state to provide notice of use tax due (South Dakota and Vermont, 2011). If you are an affiliate that lives in any of these states, or a retailer doing business with affiliates in these states, please consult a tax or legal professional.

    ** The laws did not pass in Hawaii or South Carolina, as indicated in the article.

  2. Pat Grady says:

    my guess is this affects more affiliates than any preceding state.  CA, this will hurt your state.

  3. I think this is both insane and catastrophic for California. I also
    think that, with New York, Illinois and California as evidence to the
    contrary, as an industry we can no longer say we are winning this
    fight.  

  4. Courtney Turner says:

    My question is does using Google ad services, like Google AdWords, constitute nexus in California? They get paid for advertising, so my assumption is that it does. And what about Facebook ads? A lot of companies use those, too. If so, this hits everybody, including Amazon, in a much more profound way, and it’s not such an easy/clear decision to terminate affiliates in California.

  5. Jennifer Taussig says:

    This is completely disheartening, have any other retailers out there come up with a solution to continue these relationships? We need ideas and have less than 12 hours to make a decision… we would hate to remove ALL California partners.

    • SC101 says:

      A little late – but another alternative is to try CPC programs, as they don’t fall under the “affiliate” bracket. I lost an affiliate and was able to pick them up through the Shopzilla Publisher program – it took a considerable amount of time to switch out all the links but I was able to do so. The downside is that you can’t track sales data and only get paid per click – but it is definitely a stop gap for the moment. (I have also heard that they supply Amazon offers on a CPC basis)

  6. Janet says:

    Hear all the negative comments about hurting CA economy, but frankly I can’t fault Brown, Amazon CAVED and is collecting tax in NY now, what’s Brown to think when they send a threatening note to affiliates right before the bill hits his desk. I guess Amazon feels CA associates are not as important as NY associates, or maybe the CA market is more tax sensitive. Or maybe Amazon is not quite sure what they are doing.

  7. Oalbad says:

    This is why I will never vote Deomcrat again. Instead of balancing the budget they just increase the taxes. Sure Repulicans are idiots too but at least they support the right to make money

  8. […] sites are two of the best places to educate yourself. See Britt Raybould’s post there on the California Nexus Tax for strong arguments against it and check on Tax Nexus Status on the PMA […]

  9. Kevin Wallach says:

    As a footnote for those still interested in what’s happening with this Amazon has now abandoned their efforts to fight the law and is instead negotiating a safe harbor from the taxes along with some offers to put more of its physical operations in California.  While this creates jobs and helps Amazon to manage its tax liability it also puts affiliate marketers in California under the wheels of the California tax bus.  I wrote an editorial piece about it on performinsider.com and while they’re only my opinions I think a lot of affiliates inside and outside California will agree that this deal does more than just serve Amazon’s business interests.  It really sells out the affiliate marketing world that was previously part of Amazon’s success and blocks a battle that affiliate marketing desperately needs to win against this Nexus tax and future ones in other important states.  At the Federal level decisions are probably not so far away and those will have a bigger effect long term than states’ laws will.  Still in the near term the small businesses take huge hits that none of them can afford to take and California dares to call it fair.