California has become the first state in the nation to require retailers who advertise in the state to collect California sales tax on their sales. The immediate impact is apparently the cancellation of ad contracts with websites based in California.
Most Internet-based retailers collect state sales taxes only in states where they have “nexus” – usually defined as physical facilities, such as stores, warehouses or offices. The new California law claims “nexus” when a company advertises in the state.
The Performance Marketing Association (PMA), which lobbied against the bill, says that knowing passage was imminent, out-of-state retailers began sending termination letters out to California website owners, letting them know their advertising agreements would be terminated upon Governor Jerry Brown (D) signing the legislation. Rather than raise tax revenues, the organization says the real impact is that up to 25,000 California website owners may be put out of business.
“The devastation is immediate, because the law went into effect upon signing. We tried to communicate to the Governor that this bill would only lead to dramatic income loss of small businesses and job loss, and he signed the bill anyway,” said Rebecca Madigan, Executive Director of PMA.
In 2010 the in-state websites paid $151 million in California income taxes, according to PMA. “The result of the new law is that these small businesses will go out of business or move out-of-state to preserve their incomes. As a result, California’s current deficit and economic outlook will get worse,” the organization warned.
California officials have estimated that the new tax law will bring in $200 million per year. That is, if they actually collect it. Amazon.com is the biggest target and it had publicly fought against the legislation. Amazon cut off all of its California affiliation contracts, so it isn’t likely to be sending a check to Sacramento.
“I hope the education community in California is ready for those trigger cuts, because in January not only will income tax revenue from these small businesses be lower, the illusory ‘sales tax’ will not have been collected, putting California in a more precarious economic situation,” Madigan concluded.
The Performance Marketing Association (PMA) is the national trade association representing affiliate marketers.