Brown Signs Punitive Amazon Tax

(This is an updated Washington Examiner story from June 29.)

JUNE 30, 2011

By KATY GRIMES

With the California legislature having just passed a flawed budget full of accounting tricks, budget gimmicks and money grabs, one area of small business is about to be taxed right out of business — just so that the state can fill a budget hole instead of making necessary and substantive cuts.

Gov. Jerry Brown, a Democrat, just signed one of the budget trailer bills — the Amazon tax — which will tax all Internet purchases made in California and charge e-retailers a “use tax” for doing business in the state.

The “Amazon tax,” ABX1 28, was part of the budget deal, which was vetoed only 10 days ago by Brown.

And already, Amazon has notified its online affiliate businesses that the company is terminating all contracts in California.

In the face of strong evidence that this trick would most certainly put many small e-retailers and Internet affiliates out of business, legislators continued to pursue what they claimed would be a $200 million windfall of tax income. AB 155, one of the online tax bills wrapped into ABX1 28, authored by Assemblyman Charles Calderon, would change the definition of a “retailer” to include any group “that performs services in this state in connection with tangible personal property to be sold by the retailer.”

The bill states, “Qualifying services include, without limitation, the design and development of tangible personal property (merchandise) sold by the retailer, or the solicitation of sales of TPP on the retailer’s behalf. Imposes a sales tax on retailers for the privilege of selling TPP, absent a specific exemption. The tax is based upon the retailer’s gross receipts from TPP sales in this state.”

Calderon even included a “complementary use tax on the storage, use, or other consumption in this state of TPP purchased from any retailer.”

That about covers everything a retailer does. However, the bill specifies that the use tax is also imposed on “purchasers” — the customer.

But many businesses cannot pass along additional costs to customers, particularly during a recession, when they are happy just to keep selling merchandise.

Instead, out-of-state retailers and some eBay sellers are the only potential payers of this new tax money. And while many of them will be forced to collect the sales tax for California, most others stand to lose California’s business.

Amazon and other out-of-state retailers warned that they would stop doing business in the state, forcing more than 25,000 small affiliates to close businesses in California. Most commonly, the affiliates are small, Mom and Pop operations working out of their homes.

Substantial Income Lost

This will surely result in no new “use tax” money, and the income loss from the termination of the California affiliates will be substantial.

For this reason, Performance Marketing Association executive director Rebecca Madigan opposed the bill. The PMA represents 25,000 California small-business affiliates who earn revenue by placing advertisements for online retailers on their Web sites.

Months ago, Madigan warned that affiliate business operators would be forced to move or terminate their businesses if any of the Internet tax bills were signed into law. Now, all three Internet bills, wrapped into ABX1 28, have been passed and signed by the governor.

“That’s 25,000 small businesses that will be lost to California’s already struggling economy,” said Madigan. “The bill states that if someone has advertisements on California Web sites, then there is a nexus in California, and the business needs to pay taxes on all revenue collected in the state.”

Former Republican state senator George Runner, a current member of the Board of Equalization, tried to warn lawmakers that if the Internet bill passed “online retailers will terminate their relationships with the nearly 25,000 affiliates currently doing business in California. That’s what they’ve already done in other states that passed such laws, except New York, for purposes of mounting a legal challenge.”

Reducing Revenue

Runner said that, while supporters claimed the state would earn an additional $150 – $200 million in tax revenue, the punitive online tax bills would cut into the $42.2 billion in sales and use tax revenue paid last year in by California businesses, by chasing the online affiliate businesses out of California forever.

The Board of Equalization reported $124 million in state income taxes paid by affiliates in 2009 — an amount which many say has increased since 2009.

Amazon, eBay and other out-of-state businesses don’t pay California sales and use taxes because they don’t get any benefits from the state. Their workers live in other states, and do not benefit from California’s schools, roads, and other state services.

The Interstate Commerce Clause of the U.S. Constitution stipulates that only the federal government can pass laws concerning commerce that crosses state borders and is a primary reason for America’s prosperity — there are no tariffs among the 50 states. As many economists have correctly observed, America is a vast, free trade country, with 310 million producers and consumers.

Charlie Hollander, a New York diamond seller and online affiliate, does business with both Amazon and eBay. Hollandar explained that the two online retailers do business a little differently.

“Amazon invoices the client directly, while eBay requires the seller to invoice and collect. And Amazon pays affiliates directly, minus a commission.” But Hollander said, Amazon deals with American sellers, while eBay has international sellers. “How are eBay sellers going to pay taxes to all of the countries, much less to all of the American states?” asked Hollander.

Other sellers are greatly concerned as well. Loren Bendel of Savings.com, a Texas native who moved to California more than 14 years ago to pursue internet opportunities warned, “If California is not careful, they will actually be creating incentives to start businesses in other states. California is no longer the center of innovation and technology and creative breeding ground. People have other choices now.”

“The true victims of ABX1 28 are California job creators, both large and small, for-profit and non-profit, who will suffer an unavoidable loss of income if they continue to do business in this state,” Runner wrote in a letter to Brown asking the governor to veto the bill.

“The answer to California’s thirst for revenues is not to make California less friendly to business. Rather, California should extend a welcome mat to cutting edge entrepreneurs and small businesses. Job creators need fair tax policies, regulatory stability and clarity from government.”

Expect to see even more businesses fleeing California for business-friendly states.

25 comments

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  1. Soquel by the Creek
    Soquel by the Creek 30 June, 2011, 11:13

    I’m a fourth-generation native Californian, a former Amazon Affiliate, and I fully support Amazon’s position in the matter. Amazon did far more for my small business than the state of California ever has, especially for the privilege of spending an additional $800 annually on California corporate taxes.

    I fully expect that the California law will eventually end up in the Supreme Court, at taxpayer expense our course. Only the United States Congress has the authority to regulate interstate commerce, not the California Legislature.

    The state will never collect their projected revenues from this flawed policy.

    For anyone in the “producing class”, California is a high tax state already. California ranks near the bottom on general business climate and in business tax climate. It should come as no surprise that California also enjoys the nation’s 2nd highest unemployment rate.

    Reply this comment
  2. surfcitybob
    surfcitybob 30 June, 2011, 13:43

    Nevada has a lot of excess housing inventory that can be picked up for a song. Maybe California is just trying to help stimulate business for other states.

    Only a Democrat believes you can tax your way to posterity.

    Reply this comment
  3. Charlie Bean
    Charlie Bean 30 June, 2011, 19:23

    I see nothing wrong with collectug taxes and paying thiem to the State shipped. The cost of the merchandise will still be lower than many here.

    Reply this comment
  4. Richard Rider
    Richard Rider 30 June, 2011, 19:27

    As I understand it, CA Amazon customers will end up not having sales tax collected anyway, now that the thousands of CA affiliates have been terminated.

    So the state collects only a fraction of the tax projected, while thousands of small CA business suffer with many going out of business.

    Yet another Democrat stimulus plan in action. Sheer genius!

    I think this might be even dumber than the infamous electricity “deregulation” (which wasn’t deregulation) in the 1990’s.

    Reply this comment
  5. Casey
    Casey 30 June, 2011, 19:50

    By the time I gave up for the night, I was down by 94 merchants, one of which was Amazon. I don’t blame Amazon or any of my out-of-state merchants for the decision to distance themselves from us here in California.

    I’ve said this elsewhere and I’ll say it here: These tax nexus laws make as much sense as removing a car engine to improve gas mileage. Yes, the mileage will be vastly improved (on paper) but you’re not going to get very far very fast.

    I want my engine back.

    Reply this comment
  6. Sol
    Sol 30 June, 2011, 19:57

    Even if the expected revenue from this collection of use tax were met, which it most certainly won’t, and the Demoncrats could have all the other new taxes and tax increases they want, it would never be enough.

    No matter how much these criminal, clown, thieving parasites are allowed to steal, it never is enough.

    Reply this comment
  7. Rexanne
    Rexanne 30 June, 2011, 20:10

    I was born and have lived in Southern California most of my life. This law has just destroyed my small business that is the only means of support for myself and 2 children and one that has taken me 12 years to build into a viable means of income.

    The state of California will not see ANY money from this law. Merchants are simply dropping their CA affiliates so there is no “nexus” (presumption of physical location) and they will therefore not have to pay this unconstitutional interstate tax (taxation without representation).

    The budget that Gerry Brown signed is in no way “balanced” and those who created it and stuffed it on the CA people (including Governor Brown who signed and validated it) are now getting their paychecks again. Meanwhile 25 thousand CA businesses are suffering and losing money that would be taxed and spent in the state.

    This is not only a blow to California affiliate marketers but a blow to the people of California.

    Reply this comment
  8. Amy
    Amy 30 June, 2011, 20:50

    I didn’t spend today being productive. Instead we read 100s of e-mails from stores around the country. They are terminating their relationships with us. We had to figure out how to deal with the situation.

    When we discovered that most of them made the terminations effective immediately, we had to scramble to get them off of our sites. It’s almost 9pm and we are not done.

    I expect that there will be more tomorrow and that they will trickle in through next week.

    We won’t be generating income from these stores anymore. Someone in another state will and that state will collect income tax. California won’t get the income tax from those sales.

    Oh, and California won’t be receiving sales tax collections from these stores either. Just lost income for the state and its residents.

    If you think that people should pay sales tax on what they buy no matter where they buy it, you’re right. That’s the law. Unfortunately this bill won’t make that happen and just hurts businesses like mine.

    Reply this comment
  9. Amy
    Amy 30 June, 2011, 21:06

    And in case anyone thinks that we are going to any satisfaction by being able to say “I told you so” to the legislators and governor, it won’t. It still sucks that we have to go through this even though we knew that our businesses would be devastated by the passage of this law and spent over TWO YEARS telling the legislators and their staffs exactly what would happen.

    Today is the day, ladies and gentlemen of the California State Legislature… you ordered this up. Where is your $150 million that the lobbyists for the unions and big box stores promised? Oh yeah, you trusted Walmart when its lobbyist told you that this was about Main Street fairness. Did you bother to see what Walmart did to Main Streets across the country?!?

    It’s not too late to repeal this bill. Once our businesses move out of state or close, then it’s too late.

    If you want to see what it looks like when affiliate publishers move states, watch this video: http://www.youtube.com/watch?v=ckP0HWl_w3c

    Reply this comment
  10. CalWatchdog
    CalWatchdog Author 30 June, 2011, 21:31

    I am going to send these comments to Gov. Brown. This is already devastating and I fear that it will backfire immediately.

    – Katy

    Reply this comment
  11. Ron Kilmartin
    Ron Kilmartin 30 June, 2011, 22:24

    We need to get a constitutional amendment to freeze these blue jays to one four-month session every two years. No more than 25 bills per session. No housing allowance, no car allowance, no overseas trips, no perks, none. This will drive the blue jays out and make room for some eagles.

    Reply this comment
  12. craig
    craig 30 June, 2011, 22:30

    I never thought I would, but (for no other reason)I’m starting to miss Arnold. At least he would have had the sense enough to veto this bill.

    Reply this comment
  13. Amy
    Amy 30 June, 2011, 23:37

    It’s almost midnight and I’m not done yet but I can’t look at this screen anymore. It’s just too depressing. The dead stores on our sites will have to stay there a little longer.

    With the economy down, is there anything else that the California Legislature wants to put in the way of our small business having any chance of success? Isn’t California where the tech revolution is supposed to be? Shouldn’t our governement be HELPING, not HURTING internet startups?

    The state will collect more from the success of Facebook, LinkedIn, Pandora, Twitter, etc. than it could ever hope for from this bill. How about some perspective people?!? HELP the people who are generating income tax revenue and jobs!!!

    Reply this comment
  14. Amy
    Amy 30 June, 2011, 23:41

    One last thing that I just noticed… we lost partnerships today that we have had for TEN YEARS!!! We have had good working relationships with many of these companies and worked closely with them.

    This is so sad.

    Reply this comment
  15. Mary Kay Bachman
    Mary Kay Bachman 30 June, 2011, 23:48

    “The British are coming, the British are coming”……… again!

    And who voted for Jerry Brown and his liberal buddies? They taxed me enough, I no longer have a business in California.

    Reply this comment
  16. Steve
    Steve 1 July, 2011, 06:48

    Reading all these comments makes me disgusted. Why? Because only 1 of you actually said they will do something about this.

    Really? Where are your backbones? DO SOMETHING ABOUT THIS. Call your legislators. Raise hell. You really going sit there and wait 5 years while this is worked out in courts? Start a lobbying group, pool your money and do something for crying out load. Write to your local paper and every blog you can get on. Call Brown’s office. Call your local Fox affiliate.

    Doesn’t one of you have what it takes to stand up to the madness? Have you become so apathetic? It’s time to stop bending over every time these liberal sycophants feels like destroying our state.

    Reply this comment
  17. Scott O
    Scott O 1 July, 2011, 07:08

    Does having an owner in California give a corporation or LLC a nexus here? How about having an employee or contractor? If the answers are no, then creating and an LLC in Arizona to locate the business there would seem to be an answer.

    Reply this comment
  18. Bud
    Bud 1 July, 2011, 07:27

    A perfect example!

    Narcissism is the personality trait of egotism, vanity, conceit, or simple selfishness. Applied to a social group such as government, it is sometimes used to denote elitism or an indifference to the plight of others.

    If you cannot help, at least do no harm.

    Reply this comment
  19. ggswede
    ggswede 1 July, 2011, 08:22

    Good-bye California.Another business destroyed by the MOONBEAM administration.

    Reply this comment
  20. Amy
    Amy 1 July, 2011, 09:17

    Steve, I am disgusted by people who jump to conclusions with no information. The coalition to fight this was started over two years ago and led by the California Chamber of Commerce. We have met with Assemblymembers, State Senators, their staffs, the staffs of the legislative offices and other elected state officials. We have testified before Assembly and Senate committees and sub-committees when they have tried and failed to get this passed in the light of day.

    The only time this bill passes in California is as part of a trailer bill to an emergency budget.

    No one has sat around to wait, especially not for the courts. We know that the damage is done when we get terminated and by the time the courts overturn this it will be too late for our businesses. We are small business owners and employees who have used our time and money (mostly traveling to Sacramento) to fight this.

    We haven’t said that collecting sales and use tax is unfair. We just think it is wrong to put the burden on our companies, especially since all that happens is our companies get hurt and no tax is collected.

    Reply this comment
  21. Steve
    Steve 1 July, 2011, 10:08

    Amy – thanks for clarifying this, but I haven’t heard one word of this in the media. If this is going to be overturned, it has to happen in the court of public opinion. Obviously – obviously – these efforts have not worked. Time to ratchet-up the pressure.

    I am a born and raised so-cal. 50 years of watching our beautiful State run into the ground by the complete morons in Sacramento. I am also a business owner whose business is thankfully thriving right now, and am now considering moving out of CA because of the regulatory and tax burdens. What a shame.

    Until there is enough pain…nothing will happen. Have you looked at how your Assemblyman and Senator voted on the budget bill? Have you called them? Have you chewed them out? Have you threatened to have them recalled? THat and bad PR is the ONLY things they understand, because they are soley interested in one thing – re-election and their pockets.

    Reply this comment
  22. Mark Welch (LessonIndex.com)
    Mark Welch (LessonIndex.com) 1 July, 2011, 13:50

    I’ve been asking a really simple question: Please name any internet retailer who has started collecting sales tax in ANY state, because of the enactment of an “Advertising Nexus law” like California’s. Thus far, there’s only one example: Amazon made a strategic decision in New York to “collect the tax and sue,” but hasn’t repeated that strategy in any other state.

    I lost 26% of my income on Wednesday, when California forced Amazon to terminate its advertising relationship with me.

    This bill was enacted primarily to help fabricate a “balanced” budget, by falsely allocating $195 million in “expected revenue” to this law, even though everybody knows it won’t generate any new revenue.

    Reply this comment
  23. Mark Welch (LessonIndex.com)
    Mark Welch (LessonIndex.com) 1 July, 2011, 13:55

    Okay, after seeing the “Moonbeam” comments and worse, I’ve got to join the fray. Yes, the Democrats in the legislature faked a balanced budget, and Brown signed the budget knowing that it isn’t really balanced. But I understand why they did it.

    Much of the blame belongs to Republicans who readily acknowledge that tax extensions or increases are absolutely necessary to balance the budget, but who refuse to vote that way. And I understand that, too: if they did what they believed was right for California, they’d be crucified by “No Taxes” extremists, and even more extreme legislators would be elected in GOP districts.

    I’m not mad at Amazon; it did exactly what it said it would do (consistently for more than two years). I’m upset with Sacramento, but I don’t really blame anyone for what happened here (okay, maybe Nancy Skinner). It’s a bad law, enacted because there’s a very real problem with sales-tax collection. The law won’t help solve the problem, and it will cost the state money (lost income taxes), but I understand why it was passed.

    Reply this comment
  24. Chris
    Chris 5 July, 2011, 17:44

    I consider myself a pro-growth fiscal conservative and am generally opposed to tax increases. That is why I actually support the so-called Amazon tax. It is not a tax increase. We are all liable for the tax payments on online purchases, but the truth is a very small portion of us end up paying the taxes we owe come April 15th of each year.

    In my opinion, either the government treats everyone the same and doesn’t require retailers (both brick and mortar, and online) to collect the taxes owed (so that we all have to pay them at the end of the year when we file our taxes), or the government requires the taxes to be collected by all retailers. The government should not be treating individuals or businesses differently.

    Reply this comment
  25. akennedy
    akennedy 19 September, 2011, 17:46

    To anyone in the Sacramento region affected by this new tax law:
    I am writing a story for a local Sacramento magazine about this new Amazon Tax (now, Amazon Compromise) and am looking for perspective from local Amazon affiliates/small business owners like you who may be hurting because of it. Would it be possible to connect with you via email so I can get your insights for my story?

    Reply this comment

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