August 1, 2011

As state governments scramble to balance their budgets in the wake of the Great Recession, some are enacting controversial legislation, which may do more harm than good.

I wrote about state efforts to plug budget holes recently and many of my concerns are coming to fruition. On June 15, California’s assembly and senate passed Assembly Bill 28, which was enacted into law several weeks later by Governor Jerry Brown. Included in the new law is a provision that requires retailers to collect sales tax for online sales made to consumers in the state of California.

The law states that sales originated through online affiliates, located in California, are also subject to sales tax collection by the retailer if the retailer generates, in California, at least $10,000 in affiliate sales and at least $500,000 in total sales.

This isn’t a trivial change. Affiliate marketing is considered a low-risk, high-return sales strategy for retailers. A recent study by Forrester Research, produced before the passage of the new California law, expects expenditures by retailers on affiliate marketing programs to double to $4 billion by 2014. Millions of consumers earn money through affiliate programs and a percentage make a healthy living from affiliate sales.

How does the new affiliate sales tax law work in practice?

Let’s assume that Brad Pitt decides to start a blog on how hard it is to be Brad Pitt. To make a little extra money, he enters into an affiliate agreement with Amazon.com. As part of this agreement, Brad places links on his blog to books he likes on Amazon’s website. If visitors to the blog click on one of the links and subsequently purchase the item then Brad earns a commission. Since Brad lives in California, Amazon.com would now be responsible for collecting sales taxes on this affiliate-generated sale. (Full disclosure: I have an Amazon.com affiliate account but I don’t live in California.)

California isn’t the first state to require sales tax collection for online affiliate sales. New York became the first state to do so in 2008 and Arkansas, Connecticut, Illinois, North Carolina and Rhode Island subsequently passed similar laws. But given that California accounts for 13 percent of the U.S. economy and produces over $1.85 trillion worth of goods and services each year, the state has a great deal of influence on the rest of the country.

Battle lines drawn in California over Internet affiliate sales tax collection

Opposing the law were groups that represent affiliates as well as online retailers, like Amazon.com, that offer affiliate programs. They object to the law on constitutional grounds, practical grounds, fairness grounds and any other grounds imaginable. Their basic claim is that sales taxes should be collected on sales generated by retailers physically located in the state. Forcing a company that doesn’t have a physical presence in the state is a stretch (Internet sales) but it’s ludicrous to force a company that doesn’t have a presence and sells through an affiliate to collect sales taxes.

Supporting the law are retail chains, like Barnes and Noble, that generate most of their sales through physical stores as opposed to online channels. Their position is that physical retailers are at a disadvantage to online retailers when they aren’t required collect sales taxes. In California, Sales and Use Taxes range between 7.25 percent and 9.75 percent. A consumer about to make a purchase doesn’t necessarily care why they pay over 7 percent more for a purchase. If they can save the money by going online they will.

Online retailer response to AB 28X

Amazon.com’s response to the new law was swift. They terminated all of their agreements with affiliates located in California. That’s over 25,000 people that will no longer earn commissions. If a reader of Brad’s hypothetical blog now clicks on a link to a book and buys a copy on Amazon.com website they won’t receive a commission.

Related Topics

• Money

Related keywords

Mike Periu, Article, affiliates sales tax, government, taxes

Join the conversation ( 1 )

• J. David Knepper 8 months ago

  

  California, New York, Arkansas, Connecticut, Illinois, North Carolina and Rhode Island do not contribute anything to the sales process. And yet, there they are with their greedy hands out.And doesn't it seem that taxing a sale to someone in another state simply because one of three parties is located in that state constitutes taxation without representation? That was what caused the original Tea Party.