Lose/lose/lose: how California’s Amazon law hurts the state, Amazon, and individuals

Lose/lose/lose: how California’s Amazon law hurts the state, Amazon,  and individuals

Full disclosure: I am one of 10,000 California Amazon Associates. Perhaps I should say “I was”, since Amazon is ending the program in my state.

What is that program?

We Associates sign up for free with Amazon. We then are able to create special links to Amazon products (and pages). When someone clicks through that link and purchases things at Amazon, we get an advertising fee.

Amazon does not tell us where to put the links, where to report in the morning, pay us workers’ compensation, have to pay us minimum wage, or any of a number of other things that would define us as employees.

We advertise: Amazon compensates us when the advertising results in sales.

That’s how it was until California passed a law that says that because Amazon has these Associates in California, they can be compelled to collect sales tax at the time of sale on all taxable products sold into California by them.

In response, to avoid collecting the sales tax, Amazon is terminating the program in California.

I’m explaining all this up front because it does affect me personally, and you should know that. I get a small amount of money each month from those advertising fees. When I say a small amount, I get more from having subscribers. None of that compares to my regular salary for my regular job. The money helps, no question, but we don’t budget anything based on the advertising fees.

I’ve had months where those advertising fees were under $100…June will have been a good month, in part due to the Sunshine Deals sale.

So, I do have a dog in this…although it’s more like a puppy. 🙂

Sorry, you can see I can’t help being a bit light-hearted (that’s my nature), although I think this is a very serious issue.

I think it was a mistake on California’s part to pass this…so I want to start out with presenting the argument in favor.

California brick-and-mortar stores have difficulty competing with online retailers where sales tax is not collected at the time of sale. That’s unfair to those stores….and the stores employ people right here right now. When the interstate commerce clause was created, there was no idea that you could buy from another state and have the items in a day. There really is very little difference between what Amazon does when it makes a sale in California and Wal-Mart does.

Amazon has a mechanism to collect sales tax at the time of sale. They already do it in other states. These Associates are a sales force for Amazon. This doesn’t add a burden to California consumers, because they already owe the tax: it just makes sure it is collected.

That is one viewpoint. That would make it seem like California is going to get some much-needed income by passing this.

The reality is different.

Amazon still isn’t going to collect the sales tax…because they will drop the Associates program instead.

This is going to hurt cash-strapped California, not help it.

The situation before the law: California residents were expected to pay that sales tax (it may be called a “use tax” when they pay it) on their annual state taxes. My family does that, and it’s a bear. Many people don’t pay it, and it’s hard to get them to pay it.

If Amazon collected it, it would be easier for the state…but Amazon still isn’t going to collect it. The state didn’t gain anything from that.

Still, if it’s status quo, that doesn’t hurt the state, right?

It does, because the state was getting taxes on the money the thousands of Associates were receiving from Amazon. The Associates won’t get that money, so they won’t pay taxes on money they didn’t get.

California loses a source of income without gaining another one.

If this was a surprise, unprecedented move on Amazon’s part, it might make more sense that California passed this law. It’s not, though: Amazon has done the same thing in other states.

California loses on this deal.

Does Amazon lose on the deal?

Yes. Those Associates were recommending things to people that they bought. Amazon loses those additional sales. If there were ten thousand Associates in California generating sales of, say, five thousand dollars a year apiece on average, that’s fifty million dollars in sales. Yes, Amazon would be paying advertising fees, but not as much as they would make (the fee is usually under ten percent). There is also a cost in maintaining the program, of course.

Why can’t Amazon make those sales other ways?

The Associates program leverages both the social networking aspect of the internet and expertise. If someone has a blog on beekeeping, a respected blog, people are more likely to buy books that person recommends on beekeeping.

Individuals are rewarded for their expertise, and that expertise results in more sales.

Amazon is hurt by the deal.

What about the Associates?

They are clearly hurt by this deal. They lose that money. I doubt very many people are making their sole income this way, although some might be. What is probably being lost in many cases is discretionary income…which may have been spent in California (another way the state is hurt, by the way). Associates, I would guess, tend to be hobbyists, and I know there are  non-profits that use this as a way to raise some funds so they can carry on their work.

Associates are hurt by this deal.

How about consumers? Are they hurt by this?

It’s not going to directly affect anything for the consumers. They didn’t pay more for products they got from Associates: prices will stay the same (unless they were higher to account for Associates’ advertising fees…they would have been higher for everyone who bought the product, not just for those who bought it from an Associate…I think that was unlikely to have been a big factor).

They may lose some information…and possibly products. Let’s say you were an author, independently published through Amazon’s Kindle Direct Publishing. In addition to your royalty, you may have been selling the book through your website, getting an advertising fee from Amazon for doing so. Now, that piece of it is gone. You might even elect not to publish a book for that reason.

There are probably specialty bloggers who will stop blogging. The income I get from this (the royalties from subscribers primarily, in my case) justifies the time I spend on it. It’s fun, and I feel like I help people…but it would be a time and energy sink away from my family that would be harder to justify without it paying my offspring’s rent at college as well.

I’m not planning to stop blogging, by the way. 🙂 However, let’s say someone writes an expert blog on…power tools. Not a lot of subscribers, probably (it’s not an ongoing every day matter of concern for most people), but people find the blog through internet searches and buy a power tool, because the blogger has explained the advantages and disadvantages of various models. Without the Associates program, those advertising fees disappear…and maybe the blogger stops blogging.

That’s a negative for consumers.

Well, the law passed, so somebody most have wanted it, right?

Who benefits?

Brick-and-mortar stores, like Wal-Mart and Costco.

I would guess  that they lobbied for the bill, but I don’t know that. Since they are compelled to collect the sales tax (they do business in the state, clearly), the bottom line on a consumer’s purchase seems higher. Remember that the consumer owes that tax whether it’s collected at the time of sale or not, but it’s a competitive disadvantage. They also incur the costs of collecting that sales tax and sending it to the state.

They want to make it harder for internet retailers to do business, to hurt their competition.

They are hypothetically helped by this…however, that’s a narrow view of it.

Amazon is not going to collect the sales tax anyway (since they are dropping the Associates), so that bottom line perception isn’t going to change. Amazon will lose the advertising from the Associates, which could affect their sales.

The brick-and-mortars, though, lose the sales that the Associates would have made in their stores.

The Associates were getting money from out-of-state to spend in-state. Yes, they may have made some of their purchases online, but they probably used some of that money at the grocery store…and those big box stores.

What about those “Mom and Pop” stores? Doesn’t internet competition hurt them?

Sure it does…but this doesn’t change that. Amazon is still not going to collect sales tax.

This law hurts everyone.

There are some other interesting factors here.

Will Amazon have to move or change their R&D (Research and Development) facilities in California? That’s not part of the Associates piece, but there are some who suggest the wording in the bill may cause that. That wouldn’t help the state, certainly. Amazon would move those facilities, in my opinion, rather than collect sales tax on all taxable sales into California.

Another piece: Barnes & Noble already pays sales tax in all fifty states, I believe. They have a similar program…Amazon Associates could hypothetically go with them.

I don’t want to do that: I haven’t had good relationships with Barnes & Noble (except in the brick-and-mortar stores).

One other thing: none of this affects your Kindle store purchases if you are a California resident. California isn’t taxing e-books delivered electronically at this point (although they would if you bought the e-books on a CD). It doesn’t change sales of anything into California by Amazon, but I thought I’d point this out specifically.

I’m sure there are many of you who support California’s decision, and I would love to hear from you. I know the state is in financial trouble…I understand that this may seem like “closing a loophole”. If the US Supreme Court rules that advertisers count as a nexus, so be it. The New York Amazon law is likely to end up there, and they’ll we’ll get a definitive answer.

Please, feel free to comment on this post and let me (and my readers) know what you think. If you support California, I’d especially like to hear from you. If you are an Associate affected by this, feel free to tell your story.

Update: my account was closed when I went to it this morning…it’s there for historical purposes.

Update: not surprisingly, there are a lot of news stories about this…here are a few:

L.A. Times

CNET on Lab126 aspect

Seattle Times

This post by Bufo Calvin originally appeared in the I Love My Kindle blog.

16 Responses to “Lose/lose/lose: how California’s Amazon law hurts the state, Amazon, and individuals”

  1. Amazon: “Notice of Contract Termination Due to Potential New California Law” « I Love My Kindle Says:

    […] the Kindle and the world of e-books « Freebie flash! Wish, Happy, Justice, and more Lose/lose/lose: how California’s Amazon law hurts the state, Amazon, and individuals […]

  2. Common Sense Says:

    This is from The Digital Reader, this law hurts California and companies far more than just Amazon’s affiliate program:

    So last night California Governor Jerry Brown signed the new state budget into law. Part of the budget included the so called “Amazon Tax” bill, which redefined and stretched the legal definition of nexus.

    Amazon responded by cutting off their affiliates in California. I hope you weren’t surprised; Amazon have dropped affiliates every time a bill like this was passed.

    The interesting quirk about tax collection in most states is that customers have to pay the tax but retailers have to collect it. And if a retailer doesn’t have a “nexus” in a given state, that retailer doesn’t have to collect taxes. This puts out of state web retailers in the interesting position of not having to collect the sales tax that their customers have to pay.

    The detail that these “Amazon Tax” bills have in common is that they redefine what qualifies as a nexus. The laws are trying to force web retailers to collect sales tax based on not where the retailer operates, but based on where the retailer have business partners. This type of third-party obligation is at best iffy on a constitutional level, which is why Amazon have fighting it in court in new York.

    This issue is bigger than just Amazon affiliates. It also affects all sorts of small companies based in one of the states that pass these laws. Take FatWallet, for example. They moved across the border from Illinois to Wisconsin in order to escape Illinois’ version of the law. Everyone was cancelling contracts. They had to move.

    Or, just to draw an example from California, there’s also San Francisco-based VigLink. They help website owners host ads from web retailers. Their presence in California means any web retailer that have a contract with Viglink now have a nexus there, so the retailers are going to cancel the contracts.

    I’m in favor of web retailers collecting taxes, but these laws are not the way to do it.

    • bufocalvin Says:

      Thanks for writing, Common!

      There is an important inaccuracy in that article.

      Amazon did not cut off Associates in New York, because they have chosen that as the legal test case. They are putting the sales tax in a special account while they fight it, I believe.

      The other piece of it is subsidiaries. That one says that if you have a subsidiary in the state (even one that does no retail) you have to collect sales tax…bye, bye Lab126 and IMDb,if that was upheld (which I think is unlikely).

  3. Bob Fry Says:

    I’m in favor of the Calif. law, but only because it’s a step in the right direction. Ultimately, the Feds should force online retail corporations to collect sales taxes for the states and disburse it to the states. It really is stupid to force physical stores to collect the tax, but not virtual stores.

    That said, this is just a little blip in the ongoing corporate wars in the US. This country became the property of corporations several decades ago. Usually they work together against the consumer and worker, but occasionally, like this law, they are at odds with each other.

    Didn’t the ancient Greek mythology have some notion of the gods fighting each other in the heavens and mortals having to deal with the fallout? It’s something like that.

  4. Edward Boyhan Says:

    I’ve read quite a bit about this today both from mainstream media, and internet sources. The internet sources (not too surprisingly) are mostly negative on the California law, while the mainstream has been mostly reporting — not weighing in pro or con. I’ve seen very little written in support of this — so far.

    One thing I wish is that someone would post some real numbers of the effects of such laws in the states where they’ve been in place for some time.

    What were the expected revenues? What did they actually get? What unintended consequences (i.e. how was affiliate income affected, and what effect did that have on income and sale taxes from them) actually transpired? What percentage were they expecting to get from Amazon; from others?

    Politicians and their staffs usually do a “static” analysis of the impact of changes in tax regimes — this usually results in them overestimating the revenue from tax increases — in at least one semi-famous case in MD: a tax increase actually resulted in a large drop in revenue. Tho be fair doing a “dynamic” analysis is fraught with difficulties because all kinds of unknowable assumptions must be made.

    The CA situation predicts about $200MM from this — I wonder how much of that was expected to come from Amazon? I have to say, given the scale of the CA deficit ($28B this year), this appears to be a drop in the bucket. CA is also different because A2Z the sub designing the kindle is located in the state. Cutting off affiliates may not be sufficient as the following lays out:

    http://www.emailthis.clickability.com/et/emailThis?clickMap=viewThis&etMailToID=536945486

    This is headed to court and it’s only 50-50 that Amazon will prevail in this instance. Personally, this is an opportunity to lobby for a national sales tax (as Jeff Bezos advocates) :D.

    • bufocalvin Says:

      Thanks for writing, Edward!

      It’s hard to have much data yet. I think the first Amazon law was in mid-2008 in New York…and Amazon is fighting that one (I believe as the test case), so it doesn’t relate to the others very well. That just doesn’t give us very many data points.

      I agree with you that the data would be interesting…the data is almost always interesting to me. 🙂 I wouldn’t place the odds at 50/50…I think that’s an interesting assessment. These laws feel like a desperation move to me…you try, hope Amazon caves, and they pay your gas bill because they happened to glance at your car at an intersection. 🙂 If you go to court and lose, big deal…it costs you to fight it, but you made the big box retailers happy and made Amazon the bad guy. If by some odd set of circumstances it stands, wahoo!

      A national value added tax might make more sense, but there would be complaints it was modeled on other countries, which can be a tough political sale.

  5. Barnes & Noble Thanks California Governor Jerry Brown for Signing AB 28x-E-FAIRNESS « I Love My Kindle Says:

    […] For more information on my opinion on this law, see this earlier post. […]

  6. test Says:

    you people keep calling this tax the wrong name

    it’s a buy tax, not a sales tax (politicians misname alot of things to make it more palatable)

    the person making the purchase has the responsibility to paying the tax

    • bufocalvin Says:

      Thanks for writing, test!

      I’m not sure which people are “you people”. 🙂 I assume you are including the government in that…as somebody reporting on it, I tend to use the official words. I appreciate the point you are making. However, if the tax was not being collected, I believe it is the seller who would be prosecuted, not the buyer.

      Let’s say a store says to customers, “You don’t need to pay the sales tax.” In an audit, it’s apparent that the store has been selling taxable items, but not remitting the tax. The government agency would pursue the store…they would not go to each person’s housing asking them to pay. eBay sellers are responsible, for example.

      That’s my understanding of it…

      If your internet retailer doesn’t collect the applicable sales tax, then the purchaser is responsible for use tax…that’s different, and is the buyer’s responsibility.

      http://www.boe.ca.gov/sutax/faqusetax.htm

      Edited to add: I was checking something for another question, and ran across this in the above cited page. It makes the responsibilities clear:

      ===
      “The California sales tax is imposed on all California retailers. It applies to all retail sales of tangible personal property in the state. Retailers making sales in the State of California are required to remit the sales tax to the Board of Equalization. Retailers are required to pay and report sales taxes to the Board of Equalization and they have the option of collecting sales tax reimbursement from their customers. Almost all retailers utilize this option. Whether or not a retailer collects the sales tax, the retailer is liable to remit the tax due.

      The California use tax is imposed on consumers of tangible personal property that is used, consumed, or stored in this state. Use tax applies to purchases from out-of-state vendors that are not required to collect tax on their sales. Use tax also applies to most leases of tangible personal property.

      The state sales tax and use tax are “mutually exclusive,” which means either sales tax or use tax applies to a single transaction, but not both.”
      ===

  7. California Lawmakers Reduce Income Tax Revenue, Kill Jobs with Misguided NEXUS Tax – Squidbits – Greekgeek's Squidoo Blog Says:

    […] Link: Why California's Nexus Tax is a Lose, Lose, Lose situation for Californians, the state of California, and Amazon (and why the only winner in all this is, basically, Wal-Mart, which lobbied hard for this law) […]

  8. Amazon goes the state initiative route in California against the Amazon law « I Love My Kindle Says:

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  9. David Derrico Says:

    I think the CA move is asinine, for the reasons you point out. They know Amazon was just going to cut off the affiliates. So now CA doesn’t get any extra sales tax revenue AND they lose out on INCOME tax revenue since CA affiliates no longer make that income, AND they lose out on those affiliates spending that extra money in the state, paying sales taxes on the things they buy with that money, etc. It’s a lose-lose-lose, and I’m shocked states are still doing this.

    Now, if someone argues that Internet retailers have an unfair advantage over bricks & mortar retailers and that sales tax should be collected on Internet sales, that’s a different argument, and one I can understand (even if I’m not personally excited about paying any more in taxes). But this CA law does NOT make that happen.

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