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?
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:
CNET on Lab126 aspect
This post by Bufo Calvin originally appeared in the I Love My Kindle blog.