Update 11:45 a.m. Thursday: Paul Misener, Amazon's VP of Global Public Policy, just issued this statement to KQED's John Myers:
“This legislation is counterproductive and will not cause our retail business to collect sales tax for the state.”
Amazon.com has been in a running battle with states trying to wring revenue out of online commerce by implementing a sales tax on purchases made over the web.
The online retailing giant has insisted it would cut ties with California "affiliate" sellers, just as it has done in other states, if the state put such a tax on the books.
Well, California did just that in the newly minted budget deal, and the bloodletting has begun.
Affiliates who sell through the Amazon.com Associates Program received an email from the company today announcing the program will be terminated for California residents as soon as Jerry Brown signs the bill creating the tax, which he did yesterday. The bill, which was co-authored by East Bay State Senator Loni Hancock, was passed by the legislature as part of the hard-won deal that balanced the budget.
Overstock.com also announced it was dropping its California affiliates.
The L.A. Times has a good article up on the implications of the new law, not the least of which is that purchases made by Californians on the Internet will now be taxed. So-called brick-and-mortar businesses have complained for years that the sales-tax exemption for big online retailers that do not have a physical presence in the state put them at a huge competitive disadvantage. But come July 1, consumers will no longer be able to do an end-around on paying the tax by purchasing online. So even though the state sales tax will drop one percent, if you do a lot of online shopping of big-ticket items, will you come out that much ahead?
But Dana Hull in the San Jose Mercury News had this to say:
It remains far from clear, however, that the law will succeed in forcing Amazon and other online retailers to collect the sales taxes. When other states -- including Illinois, Arkansas and Connecticut -- passed similar online sales tax legislation this year, Amazon severed its ties with affiliates in those states as well. Amazon is challenging a similar New York law in court, so the issue of how far states can go in their efforts to collect online sales taxes may ultimately be headed for the U.S. Supreme Court.
The Supreme Court ruled in 1992 that states can't force businesses to collect sales tax if they have no physical presence in the state where goods are purchased. So the new California law broadens the definition of what it means for a company to have such an in-state presence. From the LA Times:
The new statute would establish that presence in two ways: when sellers pay commissions to other Internet sites in California, known as affiliates, that refer buyers; and when sellers have a related company operating in the state.
Amazon has thousands of such affiliates in California. It also has related business operations that include Lab126 Inc. in Cupertino, which develops Kindle electronic book readers, and a Studio City office for its Internet Movie Database unit.
Update Thursday: Business columnist Andrew S. Ross in the Chronicle today, on the severing with of affiliate web sites:
Whether Amazon follows through remains to be seen. It has done so in Illinois, Connecticut and Arkansas, where laws are on the books, but not in other states, such as New York.
And something I've been wondering myself:
What Amazon gets out of its move is not entirely clear. Apart from losing the income generated by the affiliates, the company would still have to pay sales taxes on goods purchased by Californians directly from its site, assuming the law stands up to likely legal challenges.
Even if they axe the affiliates, they still have the related in-state businesses that the Times mentions above, which under the new law would still qualify them as obligated to collect the tax.
And this from the Sacramento Bee today:
By dropping its California affiliates, Overstock believes "we will not be subject to the obligations," said Mark Griffin, the Utah company's general counsel.
But Assemblywoman Nancy Skinner, one of the leaders of the sales tax effort, said in a statement that e-sellers will have to collect the tax even if they cut off their affiliates.
"We hope that Amazon and Overstock rethink these bullying tactics," said Skinner, D-Berkeley.
The law might apply to Amazon regardless of how it treats its affiliates. The law is written to cover merchants with subsidiary or related companies in the state. Amazon operates multiple subsidiaries in California, including a Silicon Valley company that designed the Kindle e-reader.
We're going to try to provide clarification on all this sometime today... Stay tuned.
Update 3:30 p.m. Two weeks ago, when the online sales tax passed the first time but didn't become law because of the governor's veto of the overall budget bill, KQED's Peter Jon Shuler talked to the company-formerly-known-as-Overstock.com President Jonathan Johnson about his opinion on the matter. He also said the company (which ironically enough bought the naming rights to the Oakland A's stadium in April) would also drop its California affiliate members if the bill became law.
"Companies like O.co and Amazon and others are going to be forced to terminate their relationships with those affiliates rather than be forced to be unconstitutional sales tax collectors for the state of California," Johnson said. Johnson said the bill would end up decreasing revenue for the state.
Here's a description of the Amazon Associates program, which started in 1996, from the company's web site.
(W)ebsite owners, Web developers, and Amazon sellers make money by advertising millions of new and used products from Amazon.com and its subsidiaries, such as Endless.com and SmallParts.com. When website owners and bloggers who are Associates create links and customers click through those links and buy products from Amazon, they earn referral fees.
Update 1:47: Here's the email Amazon sent to California associates:
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.
You are receiving this email because our records indicate that you are a resident of California. If you are not currently a resident of California, or if you are relocating to another state in the near future, you can manage the details of your Associates account here. And if you relocate to another state in the near future please contact us for reinstatement into the Amazon Associates Program.
To avoid confusion, we would like to clarify that this development will only impact our ability to offer the Associates Program to California residents and will not affect their ability to purchase from Amazon.com, Endless.com, MYHABIT.COM or SmallParts.com.
We have enjoyed working with you and other California-based participants in the Amazon Associates Program and, if this situation is rectified, would very much welcome the opportunity to re-open our Associates Program to California residents. We are also working on alternative ways to help California residents monetize their websites and we will be sure to contact you when these become available.
The Amazon Associates Team
Update 2:30 p.m. This tweet from KQED's John Myers:
Looks like Amazon warning email 2 CA "affiliates" is verbatim one sent 2 Arkansas over similarsales tax fight 2 wks ago. #cabudget
— John Myers (@johnmyers) June 29, 2011
So in what states does Amazon pay online sales tax?
Amazon has several distribution centers in Kentucky.
Amazon has a publishing office in New York, but still fought to prevent paying state taxes. In 2008 the New York State legislature passed a bill as part of their budget that required many online store that gets customers referred to the by in-state Web sites, well hello Amazon Associates program. Amazon and Overstock sued, claiming that their affiliate programs are simply a form of advertising, and lost in a State Supreme Court (read the ruling, pdf). So far Amazon has continued to collect sales tax, and keep it's NY affiliates. One reason may be that the law gives companies a strong incentive, if they collect taxes they are forgiven any liability on sales before June 1, 2008.
Amazon has corporate offices in Grand Forks, North Dakota.
Amazon is based in Seattle, Washington and pays state taxes.
Update 2:10 p.m. Our community engagement specialist Ian Hill has curated some responses from disgruntled affiliates caught off-guard by the announcement.
KQED News Interactive Producer Lisa Pickoff-White contributed to this post.