California's 'Amazon Law' Elevates Internet Sales Tax War to New Level

It's official: The Golden State has passed an "Amazon Law".

By now you've certainly heard about this significant development in the taxation of internet sales as this story has received California sized coverage.  The reports are everywhere including on our own news breaking AllBusiness.com site (See "Thousands of Affiliates Cut Off After California Enacts 'Amazon Tax'"  and "The 'Amazon Tax' Passes, but Who Really Wins?")

Many of the news reports have focused on Amazon terminating its contractual relationship with thousands of California "affiliates." Over the last several weeks, Amazon had warned that it would sever its affiliate contracts if Governor Brown signed the "Amazon" legislation.  The mega online retailer didn't hesitate to carry out its threat in other states that have enacted "Amazon Laws," such as Connecticut and Illinois.  

But with California being the largest state to date to enact an "Amazon Law," and the state with the largest number of affiliates, some wondered whether Amazon would actually follow through.  

Amazon wasted absolutely no time!  Even before the ink on Governor Brown's signature had dried, Amazon informed its thousands of California marketing affiliates that it would terminate their contracts stating that it opposed the bill "because it is unconstitutional and counterproductive."  Amazon added that "similar legislation in other states has led to job and income losses, and little, if any, new tax revenue" and concluded that it deeply regretted that it "must take this action." 

But what exactly, does California's "Amazon Law" say? 

As I shift into tax consultant mode, I'll mention that the law is California Assembly Bill No 28 (AB 28). Internet sales tax laws have been nicknamed "Amazon Laws" after their largest target and also because Amazon.com sued New York after that state passed the nation's first "Amazon Law" in 2008. (Overstock.com was also a party the suit.) Legally, they're known as "presumptive nexus" laws, meaning that if a taxpayer engages in the activity described in the law, a rebuttable presumption of nexus is deemed to exist.  

Nexus gives a state the right to impose various types of taxes, and in the case of sales tax nexus, permits a state to impose a sales tax collection requirement. 

Note that the "Amazon laws" do not impose taxes on the e-tailers they target (as some headlines might lead one to believe), they simply require out-of-state retailers to collect the sales tax that purchasers haven't been remitting to the state. That's right, these Internet sales you thought were tax free, never were!  Purchasers are supposed to voluntarily pay the state use (sales) tax on taxable purchases on which no sales tax was charged, but few rarely do. And it's much easier for revenue-hungry states to force retailers to collect sales taxes than it is to collect the use tax from millions of individual consumers. 

To paraphrase the legalese that's in California's "Amazon Law," the new law expands the definition of a "retailer" to include any retailer that enters into an agreement with a California "person" (resident or business) to compensate the California "person" a commission or other compensation for referring potential purchasers to the retailer's site whether by an Internet-based link or Internet website. This expanded definition only applies if the retailer, in the prior 12 months, made at least $500,000 in sales to California purchasers and paid at least $10,000 in cumulative commissions to its California affiliates.  

How will California's Amazon Law impact small and medium-sized businesses?

While it's obvious that "Amazon Laws" target large online retailers that lack a physical presence in their state, smaller non-California based retailers that meet the expanded "retailer" definition could find they're now required to charge sales tax to California purchasers, too. The use of affiliate marketing has grown rapidly in the last few years, and companies of all sizes use California-based marketing affiliates to drive potential customers to their online stores. It's these smaller companies that will be negatively impacted, as they now have to deal with charging California sales tax at varying rates depending on where in California their customer is located. 

And what about those California-based affiliates whose contracts Amazon severed?  Many of these are themselves small and medium-sized businesses that signed on to be Amazon associates and were earning a significant amount of revenue from their affiliate marketing contracts.  (See "Small Web firms caught in 'Amazon tax' fight")  For some of these smaller California-based businesses, their contract with Amazon is so valuable they'll consider relocating their entire operations to a different state to retain their Amazon contracts. 

Perhaps California's Governor Brown should have spoken to Illinois' Governor Quinn before signing the Amazon legislation.  

In March, Illinois Gov. Brown signed that state's Amazon legislation into law.  The very next month, FatWallet.com, an online coupon company and Amazon marketing affiliate, relocated its entire operation to neighboring Wisconsin. According to Tom Storm, FatWallet's CEO, staying in Illinois would have meant losing 30 to 40 percent of the Company's revenue. (See FatWallet.com's amusing "Moving Day" documentary.) There's already been relocation talk by some California-based companies that value their Amazon affiliate relationships.  (See "Savings.com: The California Internet Tax Law and Unintended Consequences")

Final Thoughts

Incidentally, despite the fact that California's internet sales tax law went into effect on July 1, it appears that neither Amazon.com or Overstock.com are collecting sales tax on sales to California purchasers. (See "Amazon, Overstock thumb nose at California tax")  Yes, indeed, California's "Amazon Law" has elevated the internet sales tax war to a new level.  

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Sylvia F. Dion, MPA, CPA is a tax consultant based near Boston, Massachusetts.  She specializes in provided State and Local Tax consulting services to businesses and is the creator, author and publisher of "The State and Local Tax 'Buzz' , a professional blog focused on state tax developments.  Follow her on twitter at http://www.twitter.com/SylviaDionCPA.  She can be reached at: sylviadion@verizon.net.

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