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Thursday, July 9, 2009

Collecting Use Tax Is Not A Tax Increase

A few states, including California, have tried to or have, enacted a copy of what New York enacted in April 2008 to try to get non-present vendors (such as Amazon) to collect sales tax because the state's citizens are not very compliant about paying their use tax when they buy goods online from non-present (remote) vendors.

On July 1, Governor Schwarzenegger vetoed SBX3 17 (click here and search for this bill). Among a few other things, this bill would modify R&T Section 6203 on "retailer engaged in business in this state" to include:

"Any retailer entering into an agreement or agreements under which a person or persons in this state, for a commission or other consideration, directly or indirectly refers potential purchasers of tangible personal property to the retailer, whether by a link or an Internet Web site or otherwise, provided that the total cumulative sales price from all of the retailer's sales of tangible personal property to purchasers in this state that are referred pursuant to all of those agreements with a person or persons in this state, within the preceding 12 months, is in excess of ten thousand dollars ($10,000).
(B) This paragraph shall not apply if the retailer can demonstrate that the person in this state with whom the retailer has an agreement did not engage in referrals in the state on behalf of the retailer that would satisfy the requirements of the commerce clause of the United States Constitution.
(C) An agreement under which a retailer purchases advertisements from a person or persons in this state, to be delivered on television, radio, in print, on the Internet, or by any other medium,is not an agreement described in subparagraph (A), unless the advertisement revenue paid to the person or persons in this state consists of commissions or other consideration that is based upon sales of tangible personal property."

For more information on this type of law - please see my prior posts: 8/8/08, 2/10/09, 4/22/09.

In vetoing this bill on 7/1/09, Governor Schwarzenegger stated:

"Following’s announcement that it will pull its affiliate advertising from California due to the legislature’s proposal to increase taxes and the announcements of other companies such as threatening to follow suit, Governor Schwarzenegger today reiterated his deep commitment to not raising taxes to solve our state’s budget deficit and announced will reinstate California-based internet affiliate advertisers:

“After passing the largest tax increase in California history, it makes absolutely no sense to go back to the taxpayers to solve the current shortfall - that’s why yesterday I vetoed the majority vote tax increase passed by the legislature. With unemployment at an all time high, we should be doing everything we can to - keep jobs and create jobs - in California. That is why my Administration immediately contacted when we learned of this news and, I am pleased to announce has reversed its decision and will continue to do business with affiliates here in California. I will continue to fight to keep jobs and businesses in California.”

California lawmakers proposed a tax on affiliate advertising and sent legislation to the Governor, but as promised he vetoed it because we cannot solve our budget deficit by raising taxes and driving businesses out of the state. estimates its internet affiliate advertisers in California create millions of dollars in revenue."

The part in bold above was emphasized by me. The proposal to broaden the definition of "retailer" isn't a tax increase, it just shifts who is responsible to collect the tax. Is it any wonder people are confused about use tax and most don't pay this tax that has been around since the 1930s?

While I don't agree with the approach of SBX3 17, I'm disappointed to see the statement that seems to imply that no one - neither Overstock or its California customers should pay use tax because it would be a tax increase. IT IS NOT A TAX INCREASE. It is just a desperate attempt to get SOMEONE to pay the use tax. Every year, over $1 billion of use tax goes uncollected in California!

The problem with SBX3 17 is that it is too easy for those affected to avoid having to become sales tax collectors. The vendor who has the web link/commission agreements with the associates just has to end these arrangements. This is what Overstock did in New York (Amazon started collecting the tax) and what both are apparently doing in other states that consider or do enact similar laws. If it is that easy to avoid collection, that's not a very effective law change.

I think the arrangements that Amazon, Overstock and others have with people and organizations who enter agreements with the vendors to put links on their pages and earn commissions on any sales that originate from the link, are interesting. Some of these affiliates make a decent amount of money. An article in BNA's Pike and Fischer's Internet Law & Regulation Weekly Alert (7/8/09) included a statement from Overstock President Jonathan Johnson that some affiliates make over $100K per year from these arrangements. You can do a Google search to find a variety of offers to help you make tons of money from this type of arrangement.

This money should all be reported on 1099s and the affiliates should be paying income tax on that which is good for the state. But it does raise an interesting question - how does an affiliate/associate earn over $100K in commissions from a link on its web page? It sounds like it would have to be making effort to direct a lot of traffic to its link. Is that selling? The contract between the vendor and affiliate/associate will say that the affiliate/associate is not an agent and they can't bind the company - they really do not seem to be an agent - they are really more of an advertiser. Perhaps "advertising" has changed in the Internet era where some advertisers are more proactive of getting the customer to the store. Some state laws, such as in California, don't just refer to "agent" in the state, but also to "representative" in the state - whatever that is (R&T Section 6203(c)(2)). If the Board of Equalization thinks an affiliate/associate actively getting people to buy from a remote vendor is a "representative," they can pursue that without a legislative change.

It's all also an example of how our old law doesn't work clearly for today's types of transactions that were not envisioned when the laws were written decades ago.

A few more interesting links:
- Overstock 7/1/09 press release on its reaction to legislative efforts to get it to collect use tax on behalf of its customers and a few states.
- Info from on making money as an affiliate
- An Affiliates Convention was held in Denver in June 2009

Today's business model is definitely challenging old rules. Enacting ineffective changes though is not the way to go. Technology could solve some of these problems (see prior post). The state definitely needs to do more to get consumers (and elected officials) to know what a use tax is. The state has already made it easy to pay use tax because you can do so on your California income tax form (which is easier than completing a sales tax form). California could make it EVEN EASIER by creating a table where all a person needs to do is find their income category and pay the stated use tax. If they don't like that, they can keep their receipts and pay the actual amount. Several states use the table approach (although usually, you need to add to it the use tax on big ticket items such as those costing over $1,000).

I say let's stop wasting time on ineffective law changes and instead - educate consumers about the use tax, create easy ways for it to be collected (technology or tax tables), and take a closer look at some of the affiliate arrangements to see if perhaps some have created a physical presence for the commission-paying vendor.

What do you think?

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