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Thursday, June 30, 2011

Should the Internet be Taxed? | WebProNews

Should the Internet be Taxed?

Amazon Shuts Down California Affiliates, Following New Tax Law

On Friday, a new California state law goes into effect that will tax Internet sales through affiliate advertising. Rather than pay such taxes, online retailers like Amazon will instead shut down their affiliate programs in the state. For Amazon, that is said to come to 25,000 sites in California alone.

Was this a wise move by the California government? Tell us what you think.

Democrat Governor Jerry Brown has called it a “common sense idea,” according to one report from the LA Times. Though clearly many disagree with that notion, thinking that it will do more harm that good. Amazon CEO Jeff Bezos has said in the past that the company is protected in the U.S. constitution’s prohibition of state’s interference in interstate commerce:

And in the U.S., the Constitution prohibits states from interfering in interstate commerce. And there was a Supreme Court case decades ago that clarified that businesses — it was mail-order at that time because the Internet did not exist — that mail-order companies could not be required to collect sales tax in states where they didn’t have what’s called “nexus.”

So there’s that, but as my colleague Josh Wolford noted in a recent related article about Texas, more and more states are saying that Amazon affiliates count as physical presences and are enacting sales tax regulations already.

That’s why Amazon has been shutting down affiliate programs. Amazon has told affiliates in the past that they’d have to move to another state to continue earning commissions on referrals. has reportedly done that before too.

It’s worth noting that California’s sales tax rate in general will be dropping to 7.75%. Here is the bill that was signed into law (pdf).

Some groups representing brick and mortars feel the law should be extended on a national level, claiming the taxes take away competitive advantages from Internet retailers that don’t have a physical presence in a particular state. Consumers are able to avoid fees from purchasing from these retailers that they’d otherwise have to pay by buying in-state.

Affiliates have been informed of the termination of their contracts with Amazon. They have received a letter from Amazon saying:

(The bill) specifically imposes the collection of taxes from consumers on sales by online retailers – including but not limited to those referred by California-based marketing affiliates like you – even if those retailers have no physical presence in the state.

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. 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.

Danny Sullivan, a California resident wrote Bezos an open letter “thanking him” on his personal blog Daggle. It begins:

“Thank you for your letter today, informing me that after seven years of being one of your affiliates — and having earned for you about $150,000 in that time — that you “deeply regret” unilaterally terminating my contract with Amazon to be an affiliate. I also especially appreciated the part where you reassured me that this action wouldn’t affect my ability to keep buying from your company. Nice touch.”

He goes on to add that while he is fortunate enough to have a successful day job, the loss of income will have a far greater impact on many other affiliates. He also makes a good point about how Amazon will continue to get paid from existing affiliate links without the actual affiliates getting paid.


I was an Internet Retailer for over 5 Years. I started in 1999, selling Pro Sound gear and Logos Bible Software. I could have never done this without the Internet. With the Cost of Renting a "Brick and Mortar" Building being out of my reach. Never mind actually Building one... The Tax issue has always been a big debate and a problem to deal with. I live in Texas and I had to charge Sales Tax on all Sales Shipped to a TX address. This was very hard to figure out and the Automated Tax and Shipping Systems for Web Sites were just being developed in the first 3 or so years. I had to figure my Tax and Shipping on a Per Customer Basis my self. This required direct contact with the Customer, either by e-mail or by Phone. Needless to say, the biggest majority of my Sales were to out of State Customers. With the "Big Box" Companies being able to Sell the same Products at about what I paid for them. Not to mention, the huge discounts that these "Big Box" Competitors get on Shipping Rates for Volume. So, Out of State Sales, with No Sales Tax was the only way I could Compete. After 5 years I finally gave up the Business. Because it took way more work and time than the money that it ever brought in. I think that California is making a Big Mistake. Taxing Internet Sales. Especially at this time, will hurt them and close down many Small Online Retailers in their State. Consumers will stop buying from Businesses Online in their Own State. And even worse, from Over Seas (more than we already do from "Big Box Retailers)!:O At a time when Sales are hard to come buy. The Big Guys have the Power to just Move On to a more "Cost Effective" State, and they will!


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