The affiliate marketing world just experienced a major seismic event today. California finally made the brazen step of passing legislation that forces online retailers to collect California sales tax regardless of physical presence. Clearly, the governor’s office thought that this move would bring in more tax dollars for a state that is drowning like the Titanic. One can thank the reckless stupidity of the lawmakers that introduced Proposition 13 back in 1978, and the voters who passed it – an effective ban on hikes to existing taxes, as getting 66% of the populace to agree on an increase will never, ever happen. Thus, they’re stuck trying to find and create new taxes: surcharge this, surcharge that, and oh, by the way, an Internet sales tax that circumvents federal law about interstate commerce. It’s not so bad that Internet purchases require payment of a sales tax. It’s that one state decided it would make its own decision about what “nexus” means, and thus decide all these unknowns about online marketing that the federal government should be deciding. You know, so there’s fairness involved? Like not screwing all the other states out of their share, or enraging them to do exactly the same thing and just hurting the businesses and affiliates trying to market them? Imagine a sale made to a California resident by an Illinois company with servers in Texas, and 8% sales tax collected by each state because each decided that they had a case for presence (whether location of purchaser, seller or seller’s technology) for a wonderful total of 24% tax. It seems ludicrous now, but could very well go that way if other states follow suit.
Amazon has already fired all its California affiliates (meaning tens of millions of possible tax revenue gone, and just Amazon alone), and we have yet to see what other companies with any kind of affiliate presence will do. Many people seem outraged, but who knows how many of them will follow suit and actually move away from California. Some won’t be able to afford moving (what with the property market as it is), or unwilling to leave Silicon Valley behind, or even unable to leave the beaches behind… In any case, BIG business is bound to move to other states, because they have the resources to do so and have the profit motive in mind, which will be maximized by living in a friendlier state. The fact that the law seems to be vague right now (how does the law apply to agencies/networks, who are sometimes in a quasi-merchant role?) will also make it more likely that grey area companies will want to move. In all, it seems like it’s making California less money in the short-term, and give the state an anti-business reputation that might be hard to erase. It is fact that all previous states that employed this same type of legislation have all lost a lot of tax revenue from online marketers who ended up moving. Plus, those states lost out in other areas too: property taxes from those individuals living in the state, income taxes from those same individuals, plus sales taxes on anything local they bought – plus all the economic blessings they bestowed on local businesses while there. If Jerry Brown really wanted to do something revolutionary, it would be to destroy Proposition 13 so they had some room to maneuver. Personally, I think California is doomed to die a slow death no matter what they do -because they will never be able to destroy Proposition 13, short of a revolution. The worst thing is that they’re responding to big box retailers like Walmart (not even the mom and pop local stores, really) who have physical stores, and who want to crush all their online competitors who have successful affiliate programs to increase their sales. The end result (I assume) they hope for is that the online retailer with “no” physical presence decreases or loses all their sales in the state, and their affiliates no longer want to serve them… which leaves them open to servicing the big box retailers like Walmart who ALSO have an online presence and so are unperturbed by this whole sequence of events.
I’m not opposed to having a sales tax. I’m just inclined to think that the federal government should be the one mandating a national sales tax and setting the definition for Internet marketing nexus (with recourse to the Supreme Court if necessary), actually collecting it, and doing the monetary distribution to the states (this last part being extremely important). That would remove all possibility of unfair advantage and anti-interstate commerce (so businesses would not have to run away from any state), vague definitions of nexus without proper industry input (some dude in the CA tax department can’t just say you have a CA nexus because they say you do, and which is impossible to fight unless you have tens of thousands of dollars and oodles of time to prosecute the state) and the crushing tax paperwork that could otherwise swamp your business. How do small businesses remit to 50 states and fill out all the proper paperwork? They would have to waste way more time filling out 50 sets of confusing tax documents with so many extra traps to get caught in, and thus more tax penalties. Instead, they’d avoid doing business that would entrap them like that… which is what we see here, people moving to another state to avoid the burden, and even shutting down if there was nowhere they could go to avoid the tax headache – obviously bad for retailers who need the marketing exposure. This nexus and interstate commerce issue is an important one that needs to be covered by the federal government, much like mail-order businesses were decided not to have physical nexus just because they mailed catalogs to a state.