If you haven’t heard yet, California passed a new law that went into effect yesterday: affiliates of a company are considered a “physcial presence” in the State of California for sales tax purposes. What this means is that companies that do business through affiliates, such as Amazon, would have to begin collecting sales tax on purchases made in California.
This doesn’t sit well with many companies, especially Amazon. Not collecting sales tax gives them a competitive advantage, and they are not about to give that up. So what was Amazon’s solution? Cut ties with all Amazon affiliates with 24 hour notice. No affiliates in California, no collecting sales tax.
What is an Affiliate
If you aren’t aware, an affiliate is someone who refers a customer to a site. For example, you can see on my sidebar, I’m an affiliate of several companies. If you click these links, you go to that company’s site, and hopefully purchase a product. In exchange, the company pays me an affiliate commission. This is how many websites generate revenue, including mine.
So, what does this law do for many small businesses in California? It just cut off a huge revenue stream. Now, I didn’t make tons of money from Amazon, but I also received notice from at least 4 other affiliates, who are considering canceling their programs as well. This could seriously impact my revenue, and I’m sure it already has impacted others revenue as well.
This is why diversification is important, but that is a side note.
Why This Law Makes No Sense For California
Proponents of this law argued that it would generate an additional $200 million in sales tax revenue. Well, if you looked at the potential sales of Amazon in California, it could have. But everyone knew Amazon would do this…so how could it generate $200 million? There was no way this would ever happen.
In fact, California is going to get a rude awakening: it is going to actually lose tax revenue as a result. How is this possible. Because not only will it not get to tax Amazon’s sales, it is going to lose the income tax from all the commissions Affiliates would have received.
Like all small businesses, websites pay taxes on their earnings too! And since California decided to cut those earnings, there will be less income tax generated come tax time! Way to balance the budget…
Conclusion
In conclusion, I feel like this is politics at its worst. This law will provide no positive economic impact to the State of California. In fact, it will negatively impact the state. This law was passed as part of the “balanced budget”. How are you going to balance a budget without that $200 million, that everyone knew would not be generated?
Politicians, please think a little critically before passing laws! It’s your job…
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I’m pretty sure that the Politians have spent that 200 million because that was the estimate. They also cannot figure out why the productive people are leaving the state and the freeloaders are moving in.
Anytime the government tries to regulate commerce, there are always adverse side effects that they either don’t care about or didn’t take into account. I bet this law will be amended or appealed pretty soon.
[...] Multiple Incomes: Why California’s Affiliate Tax Law Is Bad – A look at why California’s Affiliate Tax law is bad for everyone, including the [...]
I was an affiliate with Amazon and did not make money on this so I am not affected as much. But I feel sorry for those who have a big chunk of their earnings with Amazon.com.
They may need to move to another state that has no sales tax in order for them to continue to benefit on the Amazon earnings.
I too tried making money with Amazon and it had suboptimal performance. I don’t concentrate on it anymore. I also feel bad for those who have made a great income using it though.
California is not the first state to start taxing affiliates. North Carolina did the same thing a few years ago – clearly targeting tax dollars from Amazon. What did Amazon do? Completely pulled the plug in NC just like CA. As an accountant with a sales tax background, I know there is still a lot of grey area when it comes to sales tax laws and selling over the Internet. The tax code just wasn’t written for these types of situations. Unfortunately, I think CA and NC are hoping other states follow their lead because at some point Amazon will need to concede.
I listened to an interesting segment on NPR outlining this, with the politicians involved, the lawyers for Amazon, and local store owners interviewed. It was very interesting and showed the complexity of the issue from both sides. There are definitely dollars not going to the state that are supposed to (individuals are supposed to pay “use tax” on whatever they buy online) and I can understand a cash strapped state trying to come up with ways to collect some of that unpaid tax.
I was one of the dropped affiliates and was bummed about it, but it’s not a big part of my online income. I know one blogger who is (quickly) moving out of state to maintain her affiliate income.
[...] Why California’s Affiliate Tax Law is Bad on My Multiple Incomes [...]
This whole situation drives me crazy. Small businesses are literally being crippled by this law and as you said the state ends up losing money in the end because the small business owners income tax will be reduced.
And since Amazon has already been down this road before with other states, legislators should have known this was going to happen anyway.
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Oh wow … that stinks for all the people in California who earned money as an affiliate. Yikes. Its amazing how policy can massively alter your business, either for better or for worse, sometimes overnight.
I completely agree on CA losing money from this, and I agree that it’s more politically-motivated than economically-motivated. How about CA simply spending less money instead of trying to soak businesses dry with taxes?
I think the law wasn’t well thought out and that it was enacted by politicians looking for new ways to create revenue for their bloated bureaucracies when they should be looking for ways to cut back on their spending. Anyone who looked at it seriously would realize that it wouldn’t create any new real sources of revenue, but instead lead to companies shutting down in that state, and hurting small business owners. I think Amazon has a point as well about it not being constitutional because they don’t have an actual physical presence in the state, thus they’re not using state resources (the reason for the taxes). In any event, i’m sure you can tell i’m not a fan – just hope that my state doesn’t follow suit.