Amazon Cuts Ties With Affiliates In California To Dodge Sales Tax

Today marks the first day Amazon.com would have been required to start charging California customers a 7.25% base sales tax on their purchases, after Governor Jerry Brown signed a new piece of legislation to that effect two days ago.  The catch?  The justification for requiring this state sales tax hinged on the fact that Amazon has affiliate web sites in California that receive commissions for directing customers to them to buy items.  So, only hours after the legislation was signed, Amazon decided to fight back by severing their ties with over 10,000 affiliates in the state!

Since 1992, a Supreme Court ruling has prohibited states from collecting sales tax from businesses unless those businesses have a physical presence (such as a retail outlet) in that state.  Consumers placing the out-of-state orders are supposed to pay the taxes due themselves, but in practice, they rarely do and it’s nearly impossible to enforce.  Therefore, states have been seeking ways to broaden the definition of a “physical presence”.

One of the big reasons for Amazon’s success is their ability to undercut prices of local retailers.  (Amazon, based in Seattle, saw over $34 billion in sales last year, and their stock is up over 13% so far this year.)  But after sales tax is added to their purchase price, the price difference isn’t always significant enough to motivate people to shop online and wait for their purchases to be delivered.

The affiliates are, obviously, unhappy with this decision, but they are affected to varying extents.  One of the larger affiliates, Savings.com, currently employs 80 workers and claims that Amazon’s action cost their company as much as 20% of their total business and will probably require them to lay off some of their employees.  At the other end of the spectrum, an affiliate may simply be a single person who made a little extra cash each month by linking to Amazon from his or her home-based business web page.

California isn’t the first state to attempt to collect from Amazon, however.  So far, similar laws have been passed in New York, Illinois, Rhode Island, and North Carolina – most of whom no longer have Amazon affiliate programs anymore either.  (New York managed to keep their affiliate program, most likely because it was such a huge market.)  Still more states are considering it, including Arizona, Hawaii, Louisiana, New Mexico, Missouri, Tennessee, Texas, and Vermont.  Despite these laws being commonly referred to as Amazon Tax legislation, they actually affect other web-based retailers too.  Overstock.com just severed ties with hundreds of their California-based affiliates to avoid the sales tax, and Drugstore.com says they have to rework their affiliate business model as well.

Supporters of the new CA legislation claim that Amazon denies the state over $317 million in yearly tax revenue, and they have an unfair advantage over “brick and mortar” retailers in the state at a time when they’re already financially struggling to survive.  Amazon counters by claiming the legislation was supported primarily by “big box” retailers with corporate offices located outside the state in the first place.  It appears that the General Treasurer of Rhode Island, Frank T. Caprio, is on their side as well.  He was recently quoted as saying, “The affiliate tax has hurt Rhode Island businesses and stifled their growth, as they’ve been shut out of some of the world’s largest marketplaces, and should be repealed immediately.”  In some cases, this legislation has even caused web-based business to relocate.  FatWallet, a site acting as a large affiliate to both Amazon and Overstock, moved their entire business from Illinois to Wisconsin after Illinois passed their version of the Amazon Tax.  In Texas, Amazon is currently attempting to negotiate a deal with legislators to guarantee their sales tax free status. In exchange, Amazon claims it can bring 5,000 new jobs to the state and spend $300 million on new distribution centers in Texas, where those new hires would work.  If they can’t come to an agreement, however, Amazon has the option of threatening to move its wholly-owned subsidiary, Woot.com, out of the state as well.

The marketing blog Danger Brown suggests a legal work-around for affiliates facing this dilemma.  He recommends affiliates:

1. Establish an out of state LLC or similar entity.
2. Use a registered agent service (such as Incorporate.com) to forward your first class mail, such as 1099s and so forth.
3. Open a bank account in the company’s name. It can still be a bank account in your home state.

Even eBay is getting involved, claiming to be worried about how the tax will affect individual sellers and small business sellers with eBay stores.  eBay’s senior director of government relations was quoted as saying, “We believe that putting a tax burden on small businesses and treating them the same as giant retailers is unfair. eBay is advocating a threshold that accurately defines a small business, so that the sellers that are getting started aren’t held back from growing in across the US.”

The one certain thing about this is that the fight over collecting sales tax for online purchases is far from over, as states struggle to balance their budgets.