California Taxes the Internet

Amazon workers

Workers push carts full of merchandise at the Amazon.com Phoenix Fulfillment Center in 2010. (Joshua Lott, Bloomberg / June 30, 2011)

Shopping at Amazon.com Inc. and other major Internet stores is poised to get more expensive.

Beginning Friday, a new state law will require large out-of-state retailers to collect sales taxes on purchases that their California customers make on the Internet — a prospect eased only slightly by a 1-percentage-point drop in the tax that also takes effect at the same time.

Getting the taxes, which consumers typically don’t pay to the state if online merchants don’t charge them, is “a common-sense idea,” said Gov. Jerry Brown, who signed the legislation into law Wednesday.

The new tax collection requirement — part of budget-related legislation — is expected to raise an estimated $317 million a year in new state and local government revenue.

But those taxes may come with a price. Amazon and online retailer Overstock.com Inc. told thousands of California Internet marketing affiliates that they will stop paying commissions for referrals of so-called click-through customers.

That’s because the new requirement applies only to online sellers based out of state that have some connection to California, such as workers, warehouses or offices here.

Both Amazon in Seattle and Overstock in Salt Lake City have told affiliates that they would have to move to another state if they wanted to continue earning commissions for referring customers.

“We oppose this bill because it is unconstitutional and counterproductive,” Amazon wrote its California business partners Wednesday. Amazon has not indicated what further actions it might take to challenge the California law.

Many of about 25,000 affiliates in California, especially larger ones with dozens of employees, are likely to leave the state, said Rebecca Madigan, executive director of trade group Performance Marketing Assn. The affiliates combined paid $152 million in state income taxes last year, she pointed out.

“We have to consider it,” said Loren Bendele, chief executive of Savings.com, a West Los Angeles website that links viewers to hundreds of money-saving deals. “It does not look good for our business.”   MORE

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