As part of the recent budget, California implemented an Amazon tax. There were two components of the tax. First, any business with affiliates in the Bronze Golden State must collect sales tax on Internet sales. Second, any business with subsidiaries in California even if they have separate administrative arms must collect sales tax.
Amazon did what everyone thought they’d do: They immediately dropped all affiliates in California. Here’s the notice I received:
Unfortunately, Governor Brown has signed into law the bill that we emailed you about earlier today. As a result of this, contracts with all California residents participating in the Amazon Associates Program are terminated effective today, June 29, 2011. Those 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 before today 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 your 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. As mentioned before, we are continuing to work on alternative ways to help California residents monetize their websites and we will be sure to contact you when these become available.
But what about the second part of the tax, the corporate subsidiary? Well, that will also almost certainly be a non-starter. As this article from CNET notes, a California court has already rejected this tax. In Current, Inc. vs. State Board of Equalization, the court ruled that this tax was not legal because the company in that case had separate management, did not have integrated operations, and were separate and distinct corporate entities.
Amazon does have two such subsidiaries in California, but both are run as separate, distinct corporate entities. Amazon has good lawyers, so I’d expect that they will be following this decision exactly.
But I expect the Board of Equalization (California’s sales tax agency) to try to collect the tax. Amazon will fight it and very likely win. The fight will cost California, so the state will be out the legal fees.
Additionally, California will be out the income tax collected on the money received by affiliates. I didn’t make a fortune out of being an Amazon affiliate. However, all the income I received from Amazon was reported on my tax return. If we make a guesstimate of $1 million of income received by Californians from Amazon, that means that the state will lose about $93,000 a year in tax collections. Not much, but it all adds up.
Additionally, it’s likely that large affiliates may relocate out of California to another state so that they can maintain their status. That will exacerbate the hit to California.
In summary, all the Amazon tax does is cost California legal fees, decrease California tax revenues, and cause some California businesses to relocate to another state. That doesn’t sound like a formula for increasing tax collections to me.
