California’s proposed “Amazon tax” – a destructive solution

April 24, 2009 | Loren Bendele | Comments | |

[Update: The bill has been postponed until next year, more here.]

As in most states, when Californians buy something online from a store that is based in California, they have to pay sales tax. When they buy something online from a store that does not have a presence in California, they don’t have to pay sales tax. Right?

Wrong.

Even though out-of-state retailers aren’t currently required to charge sales tax when selling into California, California consumers are actually supposed to keep track of everything they buy online from out-of-state stores and pay a “use tax” at the end of the year. The problem is that nobody does — the law is almost impossible to enforce — and California is losing out on significant income.

I was in Sacramento this past Monday meeting with legislators to lobby against a proposed bill by the California Revenue and Taxation Committee that offers a “creative” solution” to this problem. While well-intentioned, it would have disastrous ramifications for California Internet businesses.

Here’s how it would work: If you have a web-based business in California and collect revenue by showing out-of-state companies’ ads on your site, Bill AB178 will claim that both you and the businesses you advertise on your site have residence in California, and are therefore required to pay California sales tax. For example, say your Santa Monica-based web site shows banner ads for Amazon.com. With Bill AB178 in place, Amazon.com would be classified as a California-based business based on the fact that your business draws affiliate advertising sales revenue. Amazon would then be required to collect sales tax on all sales into California. The idea behind the bill is that California could force out-of-state retailers to collect and pay California sales taxes.

Sounds pretty reasonable on paper, but the reality is that a large number of those advertisers will simply refuse to work with California’s small online businesses, resulting in lost business income, lost business tax and a large number of lost jobs — which will add to California’s rising unemployment. This is exactly what happened in New York when they passed a similar bill, nicknamed the “Amazon tax”, last year: roughly 200 advertisers stopped advertising on New York-based web sites that were impacted by the legislation.

Besides the obvious income, tax and job losses, the bill could also have a significant long-term impact. Small web-advertising businesses will leave California and new companies will choose other states for setting up their businesses, making California less competitive in the tech sector.

Based on my own Internet-business background and experiences in building our web-based ecommerce company Savings.com, I’m critically aware of the impact that this will have on emerging California-based online businesses. There are roughly 40,000 people that depend on online advertising revenues in California. These businesses, some as small as one person, will be devastated by this legislation. And yet the vast majority don’t have the resources to get actively involved in lobbying against the bill, even though it will have such a critical impact on their bottom line.

As I said earlier, California is losing out on significant income because of the issue that this bill is trying to address. Clearly, lost income for the state isn’t an issue that can be ignored. But it is not something that should be remedied at the expense of the Internet businesses of California. It’s really a national issue, and I’m happy to report that I’m not the only one who feels this way. Congress is expected to introduce a Federal bill any day.

We’ve heard that the California legislature might take a vote on AB178 this coming Monday. As a California entrepreneur who understands the challenges small businesses already face without adding on a crippling state tax, I’m rooting hard for a defeat.

Loren Bendele is chief executive of Savings.com, a premiere online savings and discount service. Loren has extensive experience in e-commerce, online community building, and all things related to online savings.

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About the Author, Loren Bendele

  • Wonderful, excellent, stupendous article. I never knew about this issue....... an eyeopener.
  • California - rich state, and don't know, who is rights. I think that it is crisis.
  • They need to stop trying to figure out how to drain the bank accounts of hard working small business people and actually find real solutions to the CA budget issues.
  • "Government losing out on revenue"...

    ...It was never their damn money in the first place! Yet another example of tax happy government legislations put together with no thought of the consequences.
  • Andy
    I am a California native, and have a bunch of Internet commerce related clients. So I'd like to be able to agree with you, but ethically I cannot. I agree with the Amazon tax for a simple reason: the Internet can adapt. Retail cannot. Retail simply employs more people in this state and is under serious stress over the flight to Internet commerce. And if people buy products on Amazon.com, the revenue doesn't spill into local communities which badly need it. Dead mall syndrome becomes more acute. Businesses close and default on more loans. Property values continue to sink. More misery and more distress on an economy and a state on the brink of collapse. I'm afraid your argument is simply too self serving. Businesses will advertise on sites that add value, period. If your site ads value, you shouldn't have a problem. But regardless, it's ludicrous to expect that shoppers of Amazon.com are going to report their purchases and pay taxes. And that SEATTLE BASED COMPANY or other OUT OF STATE commerce sites should NOT get a free pass.

    Sorry,
    A Bay Area resident and Internet commerce user
  • Andy, just to clarify we are not saying that these retailers shouldn't pay taxes. The problem with the proposed bill is that it makes California small businesses the "bad guy" so there will be roughly 200 major retailers that will stop working with my small company because of this bill. It will hurt CA small businesses and make our state less competitive.

    There is legislation in the works at the national level that would solve the problem AND make an even playing for all states.

    This proposed bill, AB 178, is not the answer our state needs.
  • To echo Loren's comments, this bill is damaging because it uses an unfair, legally-dubious claim to establish nexus for out of state retailers. The retailers that do not want to be burdened with collecting taxes for states in which they have no actual presence can simply sever their relationships with affiliates, thus costing affiliates income. This is what happened in New York. Affiliate marketing is a form of advertising.
  • ryan
    great point and totally agree. this will hurt California in the long run if it is passed.
  • ajolie11
    I agree with you, but there is a bigger picture here. First, the state wastes so much money that it's comical: let's take the Bay Bridge expansion.

    Second, the state can only think about taxing instead of reducing costs. If the state were like any other business, it would cut costs and improve efficiencey while thinking about quality. As we speak, state employees don't even want to furlough a single day. If the state were a business, it would drastically cut salaries, employees and eliminate wasteful projects. Why can't it reduce it's size by 30-40%? And I'm not talking about eliminating all the teachers. There are ways to cut the budget by a huge amount, but the state just can't get serious.

    Third, when the state is in trouble, it always has a safety net - the taxpayers.

    Here's the bottom line: the state is even worse than Wall Street because it will tax business and consumer even under the worst economic conditions since WWII. Taxpayers are subsidizing the ongoing standard of living of all state employees while the standard of living of all taxpaxpayers continues to decline.
  • Great write up, Loren. In addition to the immediate lost income, this law would have a future chilling effect on the affiliate marketplace in California, which has produced some great affiliate-related companies.
  • jv99
    Don't distort the facts and make it look like the poor little businesses will be singled out.

    There are plenty of adds on Yahoo for Amazon and Yahoo is a California company last time I checked.

    California, New York and everybody else are going to tax Amazon and everybody else much sooner than later. Deal with it.
  • You're missing the point. We're ok with Amazon and Yahoo and others having to collect sales tax. We need a solution across all states. The problem with AB178 and the "Amazon Tax" is that since they single out states, it will make major advertisers not work with websites in those states. When it passed in New York (and it is being appealed and will like be reversed given the recent activities in California and Maryland) more than 200 advertisers stopped working with New York websites. This is no distorting of fact - just facts. If the bill were to pass it would cause any website in California to lose advertising revenue from any out-of-state retailer that doesn't want to collect sales tax in California.

    When a nationwide bill is created, and all retailers have to collect sales tax in all states it will be an even playing field. Until then, if a bill passes in one state it will put that state at a serious disadvantage and ultimately be a "Small Business Tax."

    The good news: the California legislation yesterday decided to move AB178 to a two year bill. This is a huge success and shows that are government is listening and that they realize the major issues with the bill. It is well intended, but currently very flawed.
  • Andy
    On California: don't get me started on how inept and anti-business this state really is. I have a company with 25 employees and everyone I know is either an entrepreneur, a company executive or financial industry person. Every single person in this state whose face isn't planted securely in the public trough (where gov't employees and legislatures always have been), believes the state is out of control. Looking for a solution? Fire your assemplymen and state Reps. Feinstein is the only one who is worth a flip. The rest have got to go.
    Andy

    PS I will read the legislation more carefully. What I am saying is simply that, the Amazon.com e-tailers (or whatever you call them these days) should not get a free pass at the expense of local retailers of the brick and mortar variety.
  • Good news everyone. AB178 has been moved to a two year bill (meaning it won't be considered until next year). Our legislation has listened to us and they are hearing the voice of small businesses.

    We're not out of the woods yet, but this is an important step. Hopefully the federal government or a coalition of states will band together to create a solution at the national level (so small businesses in individual states aren't singled out). Then AB178 will never need to be considered again. But let's keep our eyes out for future activities.
  • Big Mac
    People with internet businesses are victims? You've got to be kidding. If the bodega down the street has to collect sales tax so should the billionaires who run Amazon.