Amazon Will Dump Affiliates To Fight California Tax Law

Newsfactor.com

Amazon.com is calling a new sales-tax law in California unconstitutional. Amazon appears ready to challenge the law, which states that having affiliates in the state is the same as online retailers having a physical presence there.

Amazon is moving to terminate its affiliate program in California. In a letter to affiliates, Amazon said it will end contracts with all California residents that are participants in the Amazon Associates Program as soon as the law goes into effect.

"We oppose this bill because it is unconstitutional and counterproductive. It is supported by big-box retailers, most of which are based outside California, that seek to harm the affiliate advertising programs of their competitors," the letter argued. "Similar legislation in other states has led to job and income losses, and little, if any, new tax revenue. We deeply regret that we must take this action."

No Beating Taxes

Rob Enderle, principal analyst at the Enderle Group, said the California law puts increasing tax pressure on online retailers. In the consumer's mind, the offset for the shipping costs associated with online purchases is the savings on sales taxes. But California and other states that have enacted such laws have a different view.

"States are so hard up for cash, I think they are having a real issue providing an incentive for someone not to pay taxes in the state and have an advantage by so doing against companies that are paying taxes in the state," Enderle said.

"This is the future, whether Amazon or anybody else likes it or not. The reality is the states need the money and they are not going to give up sales-tax revenue if they can avoid it," he added. "In the end, they are going to find a way to tax Amazon for anything they sell in the state regardless. Think of this as an interim step."

Enderle isn't optimistic that Amazon can block the new law or work around it. It's true that the U.S. Supreme Court has ruled that a state can't collect sales tax from companies without a physical presence within the state, but California skirted that ruling by changing its definition of physical presence to cover companies with affiliates there.

"I don't know how you avoid paying taxes if in fact the law in the state is to pay taxes," Enderle said. "If the law was badly written, they'll just fix the law. So eventually they are going to address this issue. Amazon through litigation may be able to delay the impact. I don't think they can reasonably avoid it indefinitely."

The E-Commerce Impact

What about the impact on e-commerce? If more states move to charge sales tax on online purchases, will it dampen the market for online retail? Enderle doesn't think so.

E-commerce is ingrained in shopping habits. Shopping online isn't as much about saving money, he said, it's the convenience of online purchases.

"The online purchaser is the consumer who wants it easy and the person who wants it quick," Enderle said. "Taxes -- unless they are huge -- are not going to change that."

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